XNYS:PX Praxair Inc Quarterly Report 10-Q Filing - 6/30/2012

Effective Date 6/30/2012

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Table of Contents

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2012

OR

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from              to             

PRAXAIR, INC.

(Exact name of registrant as specified in its charter)

DELAWARE

(State or other jurisdiction of incorporation)

 

1-11037   06-1249050
(Commission File Number)   (IRS Employer 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)

N/A

(Former name, former address and former fiscal year, if changed since last report)

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  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   x    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   ¨

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

At June 30, 2012, 298,171,508 shares of common stock ($0.01 par value) of the Registrant were outstanding.


Table of Contents

INDEX

 

PART I - FINANCIAL INFORMATION

  

Item 1.

 

Financial Statements

  
 

Consolidated Statements of Income - Praxair, Inc. and Subsidiaries Quarters Ended June 30, 2012 and 2011 (Unaudited)

     1   
 

Consolidated Statements of Income - Praxair, Inc. and Subsidiaries Six Months Ended June 30, 2012 and 2011 (Unaudited)

     2   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) - Praxair, Inc. and Subsidiaries Quarters Ended June 30, 2012 and 2011 (Unaudited)

     3   
 

Condensed Consolidated Statements of Comprehensive Income (Loss) - Praxair, Inc. and Subsidiaries Six Months Ended June 30, 2012 and 2011 (Unaudited)

     3   
 

Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries June 30, 2012 and December 31, 2011 (Unaudited)

     4   
 

Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries Six Months Ended June 30, 2012 and 2011 (Unaudited)

     5   
 

Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited)

     7   

Item 2.

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations

     27   

Item 3.

 

Quantitative and Qualitative Disclosures about Market Risk

     45   

Item 4.

 

Controls and Procedures

     45   

PART II - OTHER INFORMATION

  

Item 1.

 

Legal Proceedings

     46   

Item 1A.

 

Risk Factors

     46   

Item 2.

 

Unregistered Sales of Equity Securities and Use of Proceeds

     50   

Item 3.

 

Defaults Upon Senior Securities

     51   

Item 4.

 

Mine Safety Disclosures

     51   

Item 5.

 

Other Information

     51   

Item 6.

 

Exhibits

     51   

Signature

       52   


Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Millions of dollars, except per share data)

(UNAUDITED)

 

     Quarter Ended June 30,  
     2012     2011  

SALES

   $ 2,811      $ 2,858   

Cost of sales, exclusive of depreciation and amortization

     1,602        1,640   

Selling, general and administrative

     310        309   

Depreciation and amortization

     247        254   

Research and development

     25        23   

Other income (expense) - net

     9        (5
  

 

 

   

 

 

 

OPERATING PROFIT

     636        627   

Interest expense - net

     33        36   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS

     603        591   

Income taxes

     169        163   
  

 

 

   

 

 

 

INCOME BEFORE EQUITY INVESTMENTS

     434        428   

Income from equity investments

     10        11   
  

 

 

   

 

 

 

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

     444        439   

Less: noncontrolling interests

     (15     (14
  

 

 

   

 

 

 

NET INCOME - PRAXAIR, INC.

   $ 429      $ 425   
  

 

 

   

 

 

 

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS

    

Basic earnings per share

   $ 1.43      $ 1.40   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 1.42      $ 1.38   
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.55      $ 0.50   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):

    

Basic shares outstanding

     298,885        303,709   

Diluted shares outstanding

     302,492        308,253   

The accompanying notes are an integral part of these financial statements.

 

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Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Millions of dollars, except per share data)

(UNAUDITED)

 

     Six Months Ended June 30,  
     2012     2011  

SALES

   $ 5,651      $ 5,560   

Cost of sales, exclusive of depreciation and amortization

     3,218        3,176   

Selling, general and administrative

     645        617   

Depreciation and amortization

     499        498   

Research and development

     49        45   

Other income (expense) - net

     23        (6
  

 

 

   

 

 

 

OPERATING PROFIT

     1,263        1,218   

Interest expense - net

     70        71   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS

     1,193        1,147   

Income taxes

     334        319   
  

 

 

   

 

 

 

INCOME BEFORE EQUITY INVESTMENTS

     859        828   

Income from equity investments

     17        20   
  

 

 

   

 

 

 

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

     876        848   

Less: noncontrolling interests

     (28     (25
  

 

 

   

 

 

 

NET INCOME - PRAXAIR, INC.

   $ 848      $ 823   
  

 

 

   

 

 

 

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS

    

Basic earnings per share

   $ 2.84      $ 2.71   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 2.80      $ 2.67   
  

 

 

   

 

 

 

Cash dividends per share

   $ 1.10      $ 1.00   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):

    

Basic shares outstanding

     298,981        303,890   

Diluted shares outstanding

     302,657        308,460   

The accompanying notes are an integral part of these financial statements.

 

2


Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(Millions of dollars)

(UNAUDITED)

 

     Quarter Ended June 30,  
     2012     2011  

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

   $ 444      $ 439   

OTHER COMPREHENSIVE INCOME (LOSS) (Net of Tax)

    

Translation adjustments (Note 12)

     (548     133   

Derivative instruments (Note 4)

     4        (1

Funded status - retirement obligations (Note 9)

     9        (8
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)

     (91     563   

Less: noncontrolling interests

     —          (19
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.

   $ (91   $ 544   
  

 

 

   

 

 

 
     Six Months Ended June 30,  
     2012     2011  

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

   $ 876      $ 848   

OTHER COMPREHENSIVE INCOME (LOSS) (Net of Tax)

    

Translation adjustments (Note 12)

     (276     363   

Derivative instruments (Note 4)

     5        —     

Funded status - retirement obligations (Note 9)

     16        (5
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)

     621        1,206   

Less: noncontrolling interests

     (19     (40
  

 

 

   

 

 

 

COMPREHENSIVE INCOME - PRAXAIR, INC.

   $ 602      $ 1,166   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

3


Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in millions)

(UNAUDITED)

 

     June 30, 2012     December 31, 2011  

ASSETS

    

Cash and cash equivalents

   $ 104      $ 90   

Accounts receivable - net

     1,843        1,795   

Inventories

     469        456   

Prepaid and other current assets

     236        266   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,652        2,607   

Property, plant and equipment (less accumulated depreciation of $10,719 in 2012 and $10,497 in 2011)

     10,466        10,131   

Goodwill

     2,353        2,372   

Other intangible assets - net

     152        167   

Other long-term assets

     1,065        1,079   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 16,688      $ 16,356   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 896      $ 896   

Short-term debt

     125        337   

Current portion of long-term debt

     909        387   

Other current liabilities

     798        915   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     2,728        2,535   

Long-term debt

     5,961        5,838   

Other long-term liabilities

     1,873        1,966   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     10,562        10,339   
  

 

 

   

 

 

 

Commitments and contingencies (Note 10)

    

Redeemable noncontrolling interests (Note 12)

     232        220   

Praxair, Inc. Shareholders’ Equity:

    

Common stock $0.01 par value, authorized - 800,000,000 shares, issued 2012 - 382,968,729 shares and 2011 - 382,854,272 shares

     4        4   

Additional paid-in capital

     3,835        3,809   

Retained earnings

     9,024        8,510   

Accumulated other comprehensive income (loss)

     (1,992     (1,746

Treasury stock, at cost (2012 - 84,797,221 shares and 2011 - 84,324,255 shares)

     (5,256     (5,089
  

 

 

   

 

 

 

Total Praxair, Inc. Shareholders’ Equity

     5,615        5,488   

Noncontrolling interests

     279        309   
  

 

 

   

 

 

 

TOTAL EQUITY

     5,894        5,797   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 16,688      $ 16,356   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

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PRAXAIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of dollars)

(UNAUDITED)

 

     Six Months Ended June 30,  
     2012     2011  

OPERATIONS

    

Net income - Praxair, Inc.

   $ 848      $ 823   

Noncontrolling interests

     28        25   
  

 

 

   

 

 

 

Net income (including noncontrolling interests)

     876        848   

Adjustments to reconcile net income to net cash provided by operating activities:

    

Depreciation and amortization

     499        498   

Deferred income taxes

     83        82   

Share-based compensation

     35        30   

Accounts receivable

     (47     (267

Inventory

     (14     (50

Prepaid and other current assets

     3        (32

Payables and accruals

     (118     (153

Pension contributions

     (109     (85

Long-term assets, liabilities and other

     (81     61   
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,127        932   
  

 

 

   

 

 

 

INVESTING

    

Capital expenditures

     (1,047     (767

Acquisitions, net of cash acquired

     (51     (80

Divestitures and asset sales

     71        37   
  

 

 

   

 

 

 

Net cash used for investing activities

     (1,027     (810
  

 

 

   

 

 

 

FINANCING

    

Short-term debt borrowings (repayments) - net

     (218     26   

Long-term debt borrowings

     1,400        699   

Long-term debt repayments

     (730     (204

Issuances of common stock

     107        142   

Purchases of common stock

     (313     (485

Cash dividends - Praxair, Inc. shareholders

     (328     (303

Excess tax benefit on share-based compensation

     44        41   

Noncontrolling interest transactions and other

     (41     (1
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (79     (85
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (7     4   
  

 

 

   

 

 

 

Change in cash and cash equivalents

     14        41   

Cash and cash equivalents, beginning-of-period

     90        39   
  

 

 

   

 

 

 

Cash and cash equivalents, end-of-period

   $ 104      $ 80   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these financial statements.

 

5


Table of Contents

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited)

 

Note 1. Summary of Significant Accounting Policies

     7   

Note 2. Supplemental Information

     8   

Note 3. Debt

     9   

Note 4. Financial Instruments

     10   

Note 5. Fair Value Disclosures

     16   

Note 6. Earnings Per Share – Praxair, Inc. Shareholders

     17   

Note 7. Goodwill and Other Intangible Assets

     17   

Note 8. Share-Based Compensation

     18   

Note 9. Retirement Programs

     20   

Note 10. Commitments and Contingencies

     21   

Note 11. Segments

     23   

Note 12. Equity and Redeemable Noncontrolling Interests

     24   

Note 13. Income Taxes

     26   

 

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Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

1. Summary of Significant Accounting Policies

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 and such adjustments are of a normal recurring nature. 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 2011 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2012.

Accounting Standards Implemented in 2012

The following standards were effective for Praxair in 2012 and their adoption did not have a significant impact on the condensed consolidated financial statements:

 

   

Testing for Goodwill Impairment - In September 2011, the FASB issued updated guidance on the periodic testing of goodwill for impairment. This guidance provides companies with the option to assess qualitative factors to determine if it is more-likely-than-not that goodwill might be impaired and whether it is necessary to perform a quantitative two-step goodwill impairment test. Praxair applied the updated guidance during its annual goodwill review performed in the second quarter of 2012. Refer to Note 7.

 

   

Other Comprehensive Income - In June 2011, the FASB issued (and subsequently amended in December 2011) a revised standard regarding the presentation of other comprehensive income. Praxair has elected a two-statement approach. Refer to the Condensed Consolidated Statements of Comprehensive Income (Loss) following the Consolidated Statements of Income.

 

   

Expanded Disclosures for Fair Value Measurements - In May 2011, the FASB issued additional guidance expanding the disclosures for Fair Value Measurements, particularly Level 3 inputs. Refer to Note 5 for the additional guidance, as applicable.

Accounting Standards to be Implemented

 

   

Offsetting Assets and Liabilities – In December 2011, the FASB issued updated disclosure requirements related to a company’s right or requirement to offset balance sheet items and the related arrangements associated with its financial instruments and derivative instruments. The new guidance requires the disclosure of the gross amounts subject to rights of setoff, amounts offset, and the related net exposure. This guidance will be effective for Praxair beginning with the first quarter 2013. Praxair does not expect this requirement to have any impact on the consolidated financial statements.

 

7


Table of Contents

2. Supplemental Information

Inventories

The following is a summary of Praxair’s consolidated inventories:

 

(Millions of dollars)    June 30,
2012
     December 31,
2011
 

Inventories

     

Raw materials and supplies

   $ 158       $ 153   

Work in process

     65         58   

Finished goods

     246         245   
  

 

 

    

 

 

 

Total inventories

   $ 469       $ 456   
  

 

 

    

 

 

 

Long-term receivables

Long-term receivables are not material and are largely reserved. Such long-term receivables are included within other long-term assets in the condensed consolidated balance sheets and totaled $45 million and $53 million at June 30, 2012 and December 31, 2011, respectively, net of reserves of $44 million and $64 million, respectively. The amounts in both periods relate primarily to government receivables in Brazil and other long-term notes receivable from customers. Collectability is reviewed regularly and uncollectible amounts are written-off as appropriate. The reduction in the balances during 2012 was due primarily to the collection of a portion of the government receivables, foreign currency movements and the write-off of a long-term note receivable which was fully reserved.

 

8


Table of Contents

3. Debt

The following is a summary of Praxair’s outstanding debt at June 30, 2012 and December 31, 2011:

 

(Millions of dollars)    June 30,
2012
    December 31,
2011
 

SHORT-TERM

    

Commercial paper and U.S. bank borrowings

   $ 8      $ 159   

Other bank borrowings (primarily international)

     117        178   
  

 

 

   

 

 

 

Total short-term debt

     125        337   
  

 

 

   

 

 

 

LONG-TERM

    

U.S. borrowings

    

Commercial paper(d)

     575        —     

6.375% Notes due 2012 (e)

     —          501   

1.75% Notes due 2012 (a, b, d)

     402        405   

3.95% Notes due 2013 (d)

     350        350   

2.125% Notes due 2013(a, b)

     508        513   

4.375% Notes due 2014(a)

     299        299   

5.25% Notes due 2014

     400        400   

4.625% Notes due 2015

     500        500   

3.25% Notes due 2015(a, b)

     434        434   

5.375% Notes due 2016

     400        400   

5.20% Notes due 2017

     325        325   

4.50% Notes due 2019(a)

     597        597   

3.00% Notes due 2021(a)

     498        498   

4.05% Notes due 2021(a)

     496        496   

2.45% Notes due 2022(a, c)

     598        —     

Other

     5        6   

International bank borrowings

     472        490   

Obligations under capital leases

     11        11   
  

 

 

   

 

 

 
     6,870        6,225   

Less: current portion of long-term debt

     (909     (387
  

 

 

   

 

 

 

Total long-term debt

     5,961        5,838   
  

 

 

   

 

 

 

Total debt

   $ 6,995      $ 6,562   
  

 

 

   

 

 

 

 

(a) Amounts are net of unamortized discounts.
(b) June 30, 2012 and December 31, 2011 include a $44 million and $54 million fair value increase, respectively, related to hedge accounting. See Note 4 for additional information.
(c) In February 2012, Praxair issued $600 million of 2.45% notes due 2022. The proceeds were used for general corporate purposes.
(d) Classified as long-term 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 an existing long-term agreement.
(e) In April 2012, Praxair repaid $500 million of 6.375% notes that became due.

 

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Table of Contents

4. Financial Instruments

In its normal operations, Praxair is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Praxair is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Praxair routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Praxair only uses commonly traded and non-leveraged instruments.

There are two types of derivatives that the company enters into: (i) those relating to fair-value exposures, and (ii) those relating to cash-flow exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; while cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions.

When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge or a cash-flow hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.

Counterparties to Praxair’s derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.

The following table is a summary of the notional amount and fair value of derivatives outstanding at June 30, 2012 and December 31, 2011:

 

            Fair Value  
     Notional Amounts      Assets      Liabilities  
(Millions of dollars)    June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

Derivatives Not Designated as Hedging Instruments:

                 

Currency contracts:

                 

Balance sheet items (a)

   $ 1,541       $ 1,541       $ 1       $ 2       $ 2       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Derivatives Designated as Hedging Instruments:

                 

Currency contracts:

                 

Forecasted purchases (a)

   $ 25       $ 59       $ —         $ —         $ 1       $ 2   

Interest rate contracts:

                 

Interest rate swaps (b)

     400         400         34         35         —           —     

Treasury rate lock (a)

     500         —           7         —           —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 925       $ 459       $ 41       $ 35       $ 1       $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

   $ 2,466       $ 2,000       $ 42       $ 37       $ 3       $ 4   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities.
(b) Assets are recorded in long term assets.

 

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Currency Contracts

Balance Sheet Items

Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. The fair value adjustments on these contracts are offset by the fair value adjustments recorded on the hedged assets and liabilities.

Anticipated Net Income

Historically Praxair has entered into anticipated net income hedge contracts consisting of foreign currency options and forwards related primarily to anticipated net income in Brazil, Europe and Canada. Although there were no anticipated net income hedges outstanding as of June 30, 2012 and December 31, 2011, such derivatives were outstanding during the six month periods ended June 30, 2012 and 2011. Over the term of the contracts, the fair value adjustments from net-income hedging contracts are largely offset by the impacts on reported net income resulting from currency translation. The accounting rules pertaining to derivatives and hedging do not allow hedges of anticipated net income to be designated as hedging instruments.

Forecasted Purchases

Foreign currency contracts related to forecasted purchases consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on forecasted purchases of capital-related equipment and services denominated in currencies other than the functional currency of the related operating units. These forward contracts were designated and accounted for as cash flow hedges.

Interest Rate Contracts

Outstanding Interest Rate Swaps

At June 30, 2012, Praxair had an interest-rate swap agreement outstanding related to the $400 million 3.25% fixed-rate notes that mature in 2015 which effectively convert fixed-rate interest to variable-rate interest. This swap agreement was designated as a fair value hedge with the resulting fair value adjustments recognized in earnings along with an equally offsetting charge / benefit to earnings for the changes in the fair value of the underlying debt instrument. At June 30, 2012, $34 million was recognized as an increase in the fair value of this note ($35 million at December 31, 2011).

 

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Terminated Interest Rate Swaps

The following table summarizes information related to terminated interest rate swap contracts:

 

     Year
Terminated
     Original
Gain
     Amount of Gain
Recognized in Earnings (a)
     Amount of Gain
Recognized in Earnings (a)
     Unrecognized Gain (a)  
           Quarter Ended      Six Months Ended      June  30,
2012
     December  31,
2011
 
(Millions of Dollars)          June 30,
2012
     June 30,
2011
     June 30,
2012
     June 30,
2011
       

Interest Rate Swaps

                       

Underlying debt instrument (b):

                       

$500 million 2.125% fixed-rate notes that mature in 2013

     2011       $ 18       $ 3       $ 1       $ 5       $ 1       $ 8       $ 13   

$400 million 1.75% fixed-rate notes that mature in 2012

     2010         13         1         2         3         3         2         5   

$500 million 6.375% fixed-rate notes that matured in 2012

     2002         47         —           1         1         2         —           1   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 78       $ 4       $ 4       $ 9       $ 6       $ 10       $ 19   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) The unrecognized gain for terminated interest rate swaps is shown as an increase to long-term debt and will be recognized on a straight line basis to interest expense - net over the term of the underlying debt agreements. Upon settlement of the underlying interest rate contract, the cash received is reflected within the Noncontrolling interest transactions and other in the financing section of the consolidated statement of cash flows.
(b) The notional amounts of the interest rate contracts are equal to the underlying debt instruments.

 

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Treasury Rate Locks

The following table summarizes the unrecognized gains (losses) related to treasury rate lock contracts:

 

     Year
Terminated
     Original
Gain /
(Loss)
    Unrecognized Gain / (Loss) (a)  
(Millions of Dollars)         June 30,
2012
    December 31,
2011
 

Outstanding Treasury Rate Locks (b)

        $ 7      $ —     

Terminated Treasury Rate Locks

         

Underlying debt instrument:

         

$500 million 3.000% fixed-rate notes that mature in 2021 (c)

     2011       $ (11     (10     (11

$600 million 4.50% fixed-rate notes that mature in 2019 (c)

     2009         16        12        12   

$500 million 4.625% fixed-rate notes that mature in 2015 (c)

     2008         (7     (3     (3
       

 

 

   

 

 

 

Total - pre-tax

        $ 6      $ (2

Less: income taxes

          (3     1   
       

 

 

   

 

 

 

After- tax amounts

        $ 3      $ (1
       

 

 

   

 

 

 
         

 

(a) The unrecognized gains / (losses) for the treasury rate locks are shown in accumulated other comprehensive income (“AOCI”) and upon termination will be recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements. Upon settlement of the treasury rate lock contracts, the cash received or paid is reflected within the noncontrolling interest transactions and other in the financing section of the consolidated statement of cash flows. Refer to the table below summarizing the impact on the company’s consolidated statements of income and AOCI for current period gain (loss) recognition.
(b) In June 2012 Praxair entered into a treasury rate lock contract with a notional amount of $500 million, maturing in December 2012 and covering a period of 10 years from settlement. Praxair entered into this contract in order to hedge the interest rate risk associated with the first $500 million of forecasted long-term debt issuance planned for the second half of 2012. This issuance is deemed probable and the treasury rate lock has been deemed highly effective.
(c) The notional amount of the treasury rate lock contracts are equal to the underlying debt instrument with the exception of the treasury rate lock contract entered into to hedge the $600 million 4.50% fixed-rate notes that mature in 2019. The notional amount of this contract was $500 million.

 

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The following table summarizes the impacts of the company’s derivatives on the condensed consolidated statements of income and AOCI:

 

     Amount of Pre-Tax Gain (Loss)
Recognized in Earnings (a)
 
     Quarter Ended
June  30,
    Six Months Ended
June  30,
 
(Millions of dollars)    2012     2011     2012     2011  

Derivatives Not Designated as Hedging Instruments

        

Currency contracts:

        

Balance sheet items

        

Debt-related

   $ (19   $ —        $ 18      $ (6

Other balance sheet items

     (3     3        (5     5   

Anticipated net income

     —          (2     (4     (5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (22   $ 1      $ 9      $ (6
  

 

 

   

 

 

   

 

 

   

 

 

 

 

     Quarter Ended  
     Amount of Gain  (Loss)
Recognized in AOCI (b)
     Amount of Gain  (Loss)
Reclassified from AOCI to
the Consolidated
Statement of Income (c)
     Net Change in AOCI  
(Millions of dollars)    June 30,
2012
    June 30,
2011
     June 30,
2012
     June 30,
2011
     June 30,
2012
    June 30,
2011
 

Derivatives Designated as Hedging Instruments

               

Currency contracts:

               

Forecasted purchases (b)

   $ (2   $ —         $ —         $ —         $ (2   $ —     

Interest rate contracts:

               

Treasury rate locks (b)

     7        —           —           —           7        —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total - pre tax

   $ 5      $ —         $ —         $ —         $ 5      $ —     

Less: income taxes

     (1     —           —           —           (1     —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total - Net of Taxes

   $ 4      $ —         $ —         $ —         $ 4      $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Six Months Ended  
     Amount of Gain  (Loss)
Recognized in AOCI (b)
     Amount of Gain (Loss)
Reclassified from AOCI to

the Consolidated
Statement of Income (c)
     Net Change in AOCI  
(Millions of dollars)    June 30,
2012
    June 30,
2011
     June 30,
2012
     June 30,
2011
     June 30,
2012
    June 30,
2011
 

Derivatives Designated as Hedging Instruments

               

Interest rate contracts:

               

Treasury rate locks (b)

     7        —           —           —           7        —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Less: income taxes

     (2     —           —           —           (2     —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

Total - Net of Taxes

   $ 5      $ —         $ —         $ —         $ 5      $ —     
  

 

 

   

 

 

    

 

 

    

 

 

    

 

 

   

 

 

 

 

(a) The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. The gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are recorded in the consolidated statements of income as other income (expenses)-net.
(b) The gains (losses) on forecasted purchases and treasury rate locks are recorded as a component of AOCI within derivative instruments in the consolidated statements of equity. There was no ineffectiveness for these instruments during 2012 or 2011.
(c) The gains (losses) on forecasted purchases are reclassified to the depreciation and amortization expense on a straight-line basis consistent with the useful life of the underlying asset. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt. Net gains (losses) of $1 million are expected to be reclassified to earnings during the next twelve months.

 

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5. Fair Value Disclosures

The fair value hierarchy prioritizes the input to valuation techniques used to measure fair value into three broad levels as follows:

Level 1 – quoted prices in active markets for identical assets or liabilities

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes assets and liabilities measured at fair value on a recurring basis:

 

     Fair Value Measurements Using  
     Level 1      Level 2      Level 3  
(Millions of dollars)    June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
     June 30,
2012
     December 31,
2011
 

Assets

                 

Derivative assets

     —           —         $ 42       $ 37         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Derivative liabilities

     —           —         $ 3       $ 4         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

The fair values of the derivative assets and liabilities are based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions.

The fair values of cash and cash equivalents, short-term debt, accounts receivable-net, and accounts payable approximate carrying amounts because of the short maturities of these instruments. The fair value of long-term debt is estimated based on the quoted market prices for similar issues, which is deemed a level 2 measurement. At June 30, 2012, the estimated fair value of Praxair’s long-term debt portfolio was $7,324 million versus a carrying value of $6,870 million. At December 31, 2011, the estimated fair value of Praxair’s long-term debt portfolio was $6,692 million versus a carrying value of $6,225 million. Differences from carrying amounts are attributable to interest-rate changes subsequent to when the debt was issued.

Assets measured at Fair Value on a Non-Recurring Basis

Certain assets are valued at fair value on a non-recurring basis. During the first quarter 2012, the company reduced the value of certain assets in Brazil, Colombia and Chile to estimated fair value which resulted in a $21 million pre-tax charge to other income (expense) – net in the South America segment.

 

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Table of Contents

6. Earnings Per Share – Praxair, Inc. Shareholders

Basic earnings per share is computed by dividing Net Income – Praxair, Inc. for the period by the weighted average number of Praxair common shares outstanding. Diluted earnings per share is computed by dividing Net income – Praxair, Inc. for the period by the weighted average number of Praxair common shares outstanding and dilutive common stock equivalents, as follows:

 

     Quarter Ended
June 30,
     Six Months Ended
June 30,
 
     2012      2011      2012      2011  

Numerator (Millions of dollars)

           

Net income - Praxair, Inc.

   $ 429       $ 425       $ 848       $ 823   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator (Thousands of shares)

           

Weighted average shares outstanding

     298,316         303,081         298,414         303,265   

Shares earned and issuable under compensation plans

     569         628         567         625   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used in basic earnings per share

     298,885         303,709         298,981         303,890   

Effect of dilutive securities

           

Stock options and awards

     3,607         4,544         3,676         4,570   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used in diluted earnings per share

     302,492         308,253         302,657         308,460   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share

   $ 1.43       $ 1.40       $ 2.84       $ 2.71   

Diluted Earnings Per Share

   $ 1.42       $ 1.38       $ 2.80       $ 2.67   

There were no antidilutive shares for the quarter ended June 30, 2012. Stock options of 1,611,500 were antidilutive and therefore excluded in the computation of diluted earnings per share for the six months ended June 30, 2012. There were no antidilutive shares for the quarter and six months ended June 30, 2011.

7. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the six months ended June 30, 2012 were as follows:

 

(Millions of dollars)    North
America
     South
America
    Europe     Asia      Surface
Technologies
    Total  

Balance, December 31, 2011

   $ 1,375       $ 215      $ 618      $ 24       $ 140      $ 2,372   

Acquisitions

     9         —          1        —           —          10   

Purchase adjustments & other

     6         —          —          —           —          6   

Foreign currency translation

     —           (18     (15     —           (2     (35
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Balance, June 30, 2012

   $ 1,390       $ 197      $ 604      $ 24       $ 138      $ 2,353   
  

 

 

    

 

 

   

 

 

   

 

 

    

 

 

   

 

 

 

Praxair has performed its goodwill impairment tests annually during the second quarter of each year, and historically has determined that the fair value of each of its reporting units was substantially in excess of its carrying value. For the 2012 test completed this quarter, Praxair applied the FASB’s updated accounting guidance (refer to Note 1) which allows the Company to first assess qualitative factors to determine the extent of additional quantitative analysis, if any, that may be required to test goodwill for impairment. Based on the qualitative assessments performed, Praxair concluded that it was more likely than not that the fair value of each reporting unit substantially exceeded its carrying value and therefore, further quantitative analysis was not required. As a result, no impairment was recorded.

 

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Table of Contents

Changes in the carrying amounts of other intangibles for the six months ended June 30, 2012 were as follows:

 

(Millions of dollars)    Customer &
License/Use
Agreements
    Non-compete
Agreements
    Patents &
Other
    Total  

Cost:

        

Balance, December 31, 2011

   $ 208      $ 37      $ 27      $ 272   

Additions

     13        2        —          15   

Foreign currency translation

     (1     —          —          (1

Other

     (16     (5     (6     (27
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ 204      $ 34      $ 21      $ 259   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Accumulated amortization

        

Balance, December 31, 2011

   $ (75   $ (20   $ (10   $ (105

Amortization expense

     (5     (4     (1     (10

Foreign currency translation

     (1     —          —          (1

Other

     1        5        3        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, June 30, 2012

   $ (80   $ (19   $ (8   $ (107
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at June 30, 2012

   $ 124      $ 15      $ 13      $ 152   
  

 

 

   

 

 

   

 

 

   

 

 

 

There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible asset is approximately 12 years.

Total estimated annual amortization expense is as follows:

 

(Millions of dollars)       

Remaining 2012

   $ 12   

2013

     21   

2014

     19   

2015

     18   

2016

     17   

Thereafter

     65   
  

 

 

 
   $ 152   
  

 

 

 

8. Share-Based Compensation

Share-based compensation of $18 million ($13 million after-tax) and $16 million ($11 million after-tax) was recognized during the quarters ended June 30, 2012 and 2011, respectively. Share-based compensation of $35 million ($24 million after-tax) and $30 million ($21 million after-tax) was recognized for the six months ended June 30, 2012 and 2011, respectively. The expense was recorded primarily in selling, general and administrative expenses. There was no share-based compensation cost that was capitalized. For further details regarding Praxair’s share-based compensation arrangements and prior year grants, refer to Note 15 to the consolidated financial statements of Praxair’s 2011 Annual Report on Form 10-K.

Stock Options

The weighted-average fair value of options granted during six months ended June 30, 2012 was $17.43 ($17.70 in 2011) based on the Black-Scholes Options-Pricing model. The decrease in grant date fair value year-over-year is attributable to the impact of lower interest rates partially offset by increases in Praxair’s stock price.

 

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Table of Contents

The following weighted-average assumptions were used for grants in 2012 and 2011 :

 

     Six Months Ended June 30,  
     2012     2011  

Dividend yield

     2.0     2.0

Volatility

     22.5     22.3

Risk-free interest rate

     0.86     2.2

Expected term years

     5        5   

The following table summarizes option activity under the plans as of June 30, 2012 and changes during the six months period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):

 

     Number of
Options  (000’s)
    Average
Exercise Price
     Average
Remaining
Life
     Aggregate
Intrinsic
Value
 

Outstanding at January 1, 2012

     13,540      $ 65.30         

Granted

     1,650        109.64         

Exercised

     (1,893     51.61         

Cancelled or Expired

     (41     99.75         
  

 

 

         

Outstanding at June 30, 2012

     13,256        72.67         6.1       $ 478   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at June 30, 2012

     10,129      $ 63.94         5.1       $ 454   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value represents the difference between the company’s closing stock price of $108.73 as of June 30, 2012 and the exercise price multiplied by the number of options outstanding as of that date. The total intrinsic value of stock options exercised during the quarter and six months ended June 30, 2012 was $40 million and $114 million, respectively ($78 million and $147 million during the same time periods in 2011, respectively).

Cash received from option exercises under all share-based payment arrangements for the quarter and six months ended June 30, 2012 was $29 million and $98 million ($61 million and $134 million for the same time periods in 2011, respectively). The cash tax benefit realized from share-based compensation totaled $15 million and $61 million for the quarter and six months ended June 30, 2012, of which $44 million in excess tax benefits was classified as financing cash flows for the six months ended June 30, 2012 ($28 million and $52 million tax benefit for the same periods 2011 of which $41 million represented excess tax benefit for the six months ended June 30, 2011).

As of June 30, 2012, $38 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1.1 years.

Performance-Based and Restricted Stock Awards

During the six months ended June 30, 2012, the company granted performance-based stock units to employees which vest on the third anniversary of their grant date. The actual number of shares issued in settlement of a vested award can range from zero to 150 percent of the target number of shares granted based upon the company’s attainment of specified performance targets at the end of a three-year period. Compensation expense related to these awards is recognized over the three-year performance period based on the fair value of the closing market price of the company’s common stock on the date of the grant and the estimated performance that will be achieved. Compensation expense will be adjusted during the three-year performance period based upon the estimated performance levels that will be achieved.

 

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During the six months ended June 30, 2012, the company also granted restricted stock units to employees. The majority of the restricted stock units vest at the end of or ratably over a three-year service period. Compensation expense related to the restricted stock units is recognized on a straight-line basis over the vesting period.

The weighted-average fair value of performance-based stock and restricted stock units granted during the six months ended June 30, 2012 was $103.13 and $108.60, respectively ($92.06 and $92.19 for the same periods in 2011). This is based on the closing market price of Praxair’s common stock on the grant date adjusted for dividends that will not be paid during the vesting period.

The following table summarizes non-vested performance-based and restricted stock award activity as of June 30, 2012 and changes during the six months then ended (shares based on target amounts, averages are calculated on a weighted basis):

 

     Performance-Based      Restricted Stock  
     Number  of
Shares
(000’s)
    Average
Grant  Date
Fair Value
     Number  of
Shares
(000’s)
    Average
Grant  Date
Fair Value
 

Non-vested at January 1, 2012

     962      $ 71.58         340      $ 75.51   

Granted (a)

     403        103.13         89        108.60   

Vested

     (508     56.41         (95     62.87   

Cancelled

     (10     87.84         (9     80.01   
  

 

 

      

 

 

   

Non-vested at June 30, 2012

     847      $ 88.90         325      $ 88.27   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Performance-based stock unit grants during 2012 include 120 thousand shares relating to the actual payout of the 2009 PSU grants. The original grant date fair value of these shares was $56.02, the cost of which was expensed in prior periods.

As of June 30, 2012, based on current estimates of future performance, $44 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2015 and $17 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized through the first quarter of 2017.

9. Retirement Programs

The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters and six-months ended June 30, 2012 and 2011 are shown below:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     Pensions     OPEB     Pensions     OPEB  
(Millions of dollars)    2012     2011     2012     2011     2012     2011     2012     2011  

Service cost

   $ 12      $ 11      $ 1      $ 1      $ 25      $ 22      $ 2      $ 2   

Interest cost

     30        32        3        4        61        63        6        8   

Expected return on plan assets

     (39     (38     —          —          (78     (76     —          —     

Net amortization and deferral

     17        12        (2     (2     34        23        (3     (4
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 20      $ 17      $ 2      $ 3      $ 42      $ 32      $ 5      $ 6   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Praxair estimates that 2012 contributions to its pension plans will be in the area of $120 million, of which $109 million have been made through June 30, 2012.

 

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In 2011 a number of senior managers retired. These retirees are covered by the U.S. supplemental pension plan which provides for a lump sum benefit payment option. Under certain circumstances, such lump sum payments must be accounted for as a settlement of the related pension obligation, but only when paid. As a result, Praxair expects to record a pension settlement expense of approximately $9 million in the third quarter 2012 when the payments are made to the retirees.

10. Commitments and Contingencies

Praxair is subject to various lawsuits and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Praxair has strong defenses in these cases and intends to defend itself vigorously. It is possible that the company may incur losses in connection with some of these actions in excess of accrued liabilities. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the company’s reported results of operations in any given period (see Note 17 to the consolidated financial statements of Praxair’s 2011 Annual Report on Form 10-K).

Among such matters are:

 

 

Claims by the Brazilian taxing authorities against several of the company’s Brazilian subsidiaries relating to non-income and income tax matters.

During May 2009, the Brazilian government published Law 11941/2009 instituting a new voluntary amnesty program (“Refis Program”) which allowed Brazilian companies to settle certain federal tax disputes at reduced amounts. During the 2009 third quarter, Praxair decided that it was economically beneficial to settle many of its outstanding federal tax disputes and these disputes were enrolled in the Refis Program and settled (see Note 2 of Praxair’s 2011 Annual Report on Form 10-K). The final settlement related to the Refis Program is subject to final calculation and review by the Brazilian federal government and, although the timing is very difficult to estimate, it is possible that this review could be concluded during the next year. Any differences from amounts recorded will be adjusted to income at that time.

After enrollment in the amnesty programs, at June 30, 2012 the most significant remaining claims relate to state VAT tax matters associated with procedural issues and a federal income tax matter where the taxing authorities are challenging the tax rate that should be applied to income generated by a subsidiary company. The total estimated exposure relating to such claims, including interest and penalties, as appropriate, is approximately $190 million. Praxair has not recorded any liabilities related to such claims based on management judgments, after considering judgments and opinions of outside counsel. Because litigation in Brazil historically takes many years to resolve, it is very difficult to estimate the timing of resolution of these matters; however, it is possible that certain of these matters may be resolved within the near term. The company is vigorously defending against the proceedings.

 

 

On September 1, 2010, CADE (Brazilian Administrative Council for Economic Defense) announced alleged anticompetitive activity on the part of five industrial gas companies in Brazil and imposed fines on all five companies. Originally, CADE imposed a civil fine of R$2.2 billion Brazilian reais (US$1.1 billion) against White Martins, the Brazil-based subsidiary of Praxair, Inc. In response to a motion for clarification, the fine was reduced to R$1.7 billion Brazilian reais (US$840 million) due to a calculation error made by CADE. On September 2, 2010, Praxair issued a press release and filed a report on Form 8-K rejecting all claims and stating that the fine represents a gross and arbitrary disregard of Brazilian law.

On October 19, 2010, White Martins filed an annulment petition (“appeal”) with the Federal Court in Brasilia seeking to have the fine against White Martins entirely overturned. In order to suspend payment of the fine pending the completion of the appeal process, Brazilian law required that the company tender a form of guarantee in the amount of the fine as security. Currently, 50% of the guarantee is satisfied by letters of credit with a financial institution and 50% of the guarantee is satisfied by equity of a Brazilian subsidiary.

 

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Praxair strongly believes that the allegations are without merit and that the fine will be entirely overturned during the appeal process. The company further believes that it has strong defenses and will vigorously defend against the allegations and related fine up to such levels of the Federal Courts in Brazil as may be necessary. Because appeals in Brazil historically take many years to resolve, it is very difficult to estimate when the appeal will be finally decided. Based on management judgments, after considering judgments and opinions of outside counsel, no reserve has been recorded for this proceeding as management does not believe that a loss is probable.

 

 

From 2003 to 2012, Praxair and several other co-defendants were the subject of welding fume litigation in which thousands of welders alleged personal injury caused by manganese contained in welding fumes. In January 2012, Praxair and the other co-defendants in this litigation entered into a Resolution Agreement (“Agreement”) that resolved all remaining cases against Praxair in exchange for Praxair’s payment of less than $1 million.

Contingent Asset-Resolution

Praxair’s Brazilian-based subsidiary, White Martins, had a long-standing claim against a Brazilian power company, Bandeirante Energia SA, which had been successfully litigated, and in 2011 the courts released a cash deposit to White Martins, subject to completion of an appeal process. During the first quarter of 2012, White Martins was notified that the appeal process was favorably concluded, and accordingly, recognized a $24 million gain to other income (expense), net of legal fees and another litigation matter.

 

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11. Segments

Sales and operating profit by segment for the quarters and six-month periods ended June 30, 2012 and 2011 are shown below. For a description of Praxair’s operating segments, refer to Note 18 to the consolidated financial statements of Praxair’s 2011 Annual Report on Form 10-K.

 

      Quarter Ended June 30,      Six Months Ended June 30,  
(Millions of dollars)    2012      2011 (b)      2012      2011 (b)  

SALES(a)

           

North America

   $ 1,393       $ 1,361       $ 2,791       $ 2,686   

Europe

     382         370         759         715   

South America

     520         611         1,082         1,169   

Asia

     348         348         682         665   

Surface Technologies

     168         168         337         325   
  

 

 

    

 

 

    

 

 

    

 

 

 
   $ 2,811       $ 2,858       $ 5,651       $ 5,560   
  

 

 

    

 

 

    

 

 

    

 

 

 

OPERATING PROFIT

           

North America

   $ 363       $ 326       $ 724       $ 638   

Europe

     68         72         136         140   

South America

     110         139         225         272   

Asia

     68         63         125         116   

Surface Technologies

     27         27         53         52   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total operating profit

   $ 636       $ 627       $ 1,263       $ 1,218   
  

 

 

    

 

 

    

 

 

    

 

 

 
           

 

(a) Intersegment sales, primarily from North America to other segments, were not significant for the quarters and six months ended June 30, 2012 and 2011.
(b) During the 2012 first quarter, Praxair changed the measurement of its segment sales and operating profit to be based on the country in which the customer is domiciled instead of where the company’s selling subsidiary is domiciled. The company believes these changes better represent the sales and profitability by geographic segment. These changes primarily relate to helium and specialty gas sales and result in slightly higher sales and operating profit in the Europe and Asia segments with offsetting declines in the North America segment. Prior period amounts have been reclassified to conform to the current year presentation.

 

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12. Equity and Redeemable Noncontrolling Interests

Equity

A summary of the changes in total equity for the quarters and six months ended June 30, 2012 and 2011 is provided below:

 

(Millions of dollars)       
     Quarter Ended June 30,  
     2012     2011  
Activity    Praxair, Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity     Praxair, Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance, beginning of period

   $ 5,940      $ 327      $ 6,267      $ 6,165      $ 372      $ 6,537   

Net Income (b)

     429        10        439        425        14        439   

Translation Adjustments

     (533     (15     (548     128        5        133   

Derivative Instruments, net of $1 million taxes in 2012 and net of less than $1 million 2011

     4        —          4        (1     —          (1

Funded Status - retirement obligations, net of $3 million in 2012 and 2011

     9        —          9        (8     —          (8
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income (loss)

     (91     (5     (96     544        19        563   

Dividends and other capital reductions to noncontrolling interests

     —          (43     (43     —          (19     (19

Additions (Reductions) to noncontrolling interests (a)

     —          —          —          —          (2     (2

Redemption value adjustment to redeemable noncontrolling interests

     (2     —          (2     —          —          —     

Dividends to Praxair, Inc. common stock holders ($0.55 per share in 2012 and $0.50 per share in 2011)

     (164     —          (164     (151     —          (151

Issuances of common stock:

            

For the dividend reinvestment and stock purchase plan

     —          —          —          2        —          2   

For employee savings and incentive plans

     30        —          30        67        —          67   

Purchases of common stock

     (131     —          (131     (268     —          (268

Tax benefit from share-based compensation

     15        —          15        25        —          25   

Share-based compensation

     18        —          18        16        —          16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,615      $ 279      $ 5,894      $ 6,400      $ 370      $ 6,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Six Months Ended June 30,  
     2012     2011  
Activity    Praxair, Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity     Praxair, Inc.
Shareholders’
Equity
    Noncontrolling
Interests
    Total Equity  

Balance, beginning of period

   $ 5,488      $ 309      $ 5,797      $ 5,792      $ 353      $ 6,145   

Net Income (b)

     848        18        866        823        25        848   

Translation Adjustments

     (267     (9     (276     348        15        363   

Derivative Instruments, net of $2 million taxes in 2012

     5        —          5        —          —          —     

Funded Status - retirement obligations, net of $7 million taxes in 2012 and $4 million taxes in 2011

     16        —          16        (5     —          (5
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Comprehensive income

     602        9        611        1,166        40        1,206   

Dividends and other capital reductions to noncontrolling interests

     —          (39     (39     —          (22     (22

Additions (reductions) to noncontrolling interests (a)

     —          —          —          —          (1     (1

Redemption value adjustment to redeemable noncontrolling interests

     (6     —          (6     —          —          —     

Dividends to Praxair, Inc. common stock holders ($1.10 per share in 2012 and $1.00 per share in 2011)

     (328     —          (328     (303     —          (303

Issuances of common stock:

            

For the dividend reinvestment and stock purchase plan

     3        —          3        4        —          4   

For employee savings and incentive plans

     88        —          88        144        —          144   

Purchases of common stock

     (313     —          (313     (478     —          (478

Tax benefit from stock options

     46        —          46        45        —          45   

Share-based compensation

     35        —          35        30        —          30   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 5,615      $ 279      $ 5,894      $ 6,400      $ 370      $ 6,770   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Praxair increased (decreased) its ownership in certain consolidated subsidiaries. The difference between the purchase price and the related noncontrolling interests was recorded as a decrease in Praxair’s additional paid-in-capital.
(b) In 2012, Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $5 million and $10 million for the quarter and six months ended June 30, 2012, respectively, which is not part of total equity (see below).There were no redeemable noncontrolling interests recorded at June 30, 2011.

The components of AOCI are as follows:

 

     June 30,     December 31,  
(Millions of dollars)    2012     2011  

Cumulative translation adjustments (CTA)

   $ (1,333   $ (1,057

Derivative instruments

     —          (5

Funded status - retirement obligations

     (668     (684
  

 

 

   

 

 

 
     (2,001     (1,746

Less: noncontrolling interests (CTA)

     (9     —     
  

 

 

   

 

 

 

AOCI - Praxair, Inc.

   $ (1,992   $ (1,746
  

 

 

   

 

 

 

 

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Table of Contents

Redeemable Noncontrolling Interests

Noncontrolling interests with redemption features, such as put/sell options, that are not solely within the Company’s control (“redeemable noncontrolling interests”) are reported separately in the consolidated balance sheets at the greater of carrying value or redemption value. For redeemable noncontrolling interests that are not yet exercisable, Praxair calculates the redemption value by accreting the carrying value to the redemption value over the period until exercisable. If the redemption value is greater than the carrying value, any increase is adjusted directly to retained earnings and does not impact net income.

The following is a summary of redeemable noncontrolling interests for the six months ended June 30, 2012:

 

(Millions of dollars)       

Balance, December 31, 2011

   $ 220   

Net income

     10   

Distributions to noncontrolling interest

     (4

Redemption value adjustment/accretion

     6   
  

 

 

 

Balance, June 30, 2012

   $ 232   
  

 

 

 

13. Income Taxes

In June 2012, the Company settled its 2007 and 2008 U.S. income tax audit with the Internal Revenue Service. The settlement was not significant to the consolidated financial statements.

In 2011, the Company requested a pre-filing agreement (“PFA”) with the U.S. Internal Revenue Service related to a loss of a liquidated subsidiary. The PFA may be settled during the third quarter of 2012, and if resolved favorably, could result in a benefit to income tax expense.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results

For the second quarter, Praxair’s reported sales were 2% below the prior-year quarter. Volume growth and higher prices were more than offset by the negative effects of foreign currency translation due to the strengthening of the US dollar against most foreign currencies, and lower cost pass-through, primarily lower natural gas prices. These two factors reduced sales in the quarter by 8% as compared to the prior year. Excluding these effects, sales grew 6% in the quarter from higher volumes, prices, and acquisitions. Underlying sales grew in all geographic segments except Europe. Sales growth was strongest in North America, coming from solid demand from the energy, metals, and manufacturing markets. Sales in Asia reflect new plant start-ups for chemicals and metals customers. Sales in Europe and South America as compared to the prior-year quarter reflect significant currency headwinds and lower volumes due to softer demand resulting from overall weak macro-economic conditions. New project development activity continues to be robust in North America, South America, and Asia. Reported operating profit grew 1% from the prior-year quarter. Excluding currency effects operating profit grew 9%, higher than the underlying increase in sales. Higher overall volumes, higher pricing, productivity gains, and an increase in other income contributed to the growth in operating profit. By end market, overall sales growth was strongest to the energy, metals and manufacturing markets.

The following table provides summary data for the quarters and six months ended June 30, 2012 and 2011:

 

      Quarter Ended June 30,     Six Months Ended June 30,  
(Dollar amounts in millions, except per share data)    2012     2011     Variance     2012     2011     Variance  

Reported Amounts

            

Sales

   $ 2,811      $ 2,858        (2 )%    $ 5,651      $ 5,560        2

Cost of sales, exclusive of depreciation and amortization

   $ 1,602      $ 1,640        (2 )%    $ 3,218      $ 3,176        1

Gross margin

   $ 1,209      $ 1,218        (1 )%    $ 2,433      $ 2,384        2

As a percent of sales

     43.0     42.6       43.1     42.9  

Selling, general and administrative

   $ 310      $ 309        —     $ 645      $ 617        5

As a percent of sales

     11.0     10.8       11.4     11.1  

Depreciation and amortization

   $ 247      $ 254        (3 )%    $ 499      $ 498        —  

Other income (expense) - net

   $ 9      $ (5     $ 23      $ (6  

Operating profit

   $ 636      $ 627        1   $ 1,263      $ 1,218        4

As a percent of sales

     22.6     21.9       22.4     21.9  

Interest expense - net

   $ 33      $ 36        (8 )%    $ 70      $ 71        (1 )% 

Effective tax rate

     28.0     27.6       28.0     27.8  

Income from equity investments

   $ 10      $ 11        (9 )%    $ 17      $ 20        (15 )% 

Noncontrolling interests

   $ (15   $ (14     7   $ (28   $ (25     12

Net income - Praxair, Inc.

   $ 429      $ 425        1   $ 848      $ 823        3

Diluted earnings per share

   $ 1.42      $ 1.38        3   $ 2.80      $ 2.67        5

Diluted shares outstanding

     302,492        308,253        (2 )%      302,657        308,460        (2 )% 

 

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The change in consolidated sales and operating profit compared to the prior year is attributable to the following:

 

     Quarter Ended June  30,
2012 vs. 2011
    Six Months Ended June  30,
2012 vs. 2011
 
     % Change     % Change  
      Sales     Operating
Profit
    Sales     Operating
Profit
 

Factors Contributing to Changes

        

Volume

     2     2     3     5

Price

     2     6     2     7

Cost pass-through

     (2 )%      —       (1 )%      —  

Currency

     (6 )%      (8 )%      (4 )%      (6 )% 

Acquisitions/divestitures

     2     1     2     2

Other

     —       —       —       (4 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     (2 )%      1     2     4
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables provide sales by end-market and distribution method:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % Change     % of Sales     % Change  
     2012     2011     Organic
Sales*
    2012     2011     Organic
Sales*
 

Sales by End Markets

            

Manufacturing

     26     24     7     25     24     7

Metals

     18     18     3     18     18     6

Energy

     11     11     18     11     11     17

Chemicals

     10     10     (2 )%      10     10     —  

Electronics

     8     9     (6 )%      8     9     (7 )% 

Healthcare

     8     8     5     8     9     5

Food & Beverage

     6     6     (2 )%      6     6     1

Aerospace

     3     3     11     3     3     10

Other

     10     11     (6 )%      11     10     (1 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   
     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

* Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % of Sales  
     2012     2011     2012     2011  

Sales by Distribution Method

        

On- Site

     25     25     25     25

Packaged Gas

     29     27     29     28

Merchant

     31     31     31     31

Other

     15     17     15     16
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Sales declined $47 million, or 2%, for the second quarter and increased $91 million, or 2%, for the six months ended June 30, 2012 versus the respective 2011 periods. For both the quarter and year-to-date periods, sales increased due to higher volumes and higher overall pricing. Volume growth was 2% in the quarter and 3% in the year-to-date period, attributable primarily to growth in North America and Asia, including new plant start-ups. Higher overall pricing increased sales by 2% in both the quarter and six month period. Acquisitions increased sales by 2% for both the quarter and six month periods, primarily due to the consolidation of an industrial gas business in Scandinavia in the fourth quarter of 2011. Weaker foreign currencies relative to the US Dollar reduced sales by 6% and 4% for the quarter and year-to-date periods, respectively, as compared to the same periods in 2011, and lower cost pass-through due to lower natural gas prices reduced sales by 2% in the quarter and 1% for the six month period. By customer end-market, organic sales growth to energy, metals, and manufacturing customers was strongest compared with the prior year. A further discussion of sales by segment is included in the segment discussion that follows.

Gross margin in 2012 decreased $9 million, or 1%, in the second quarter and increased $49 million, or 2%, for the six months ended June 30, 2012 versus the respective 2011 periods. For the quarter, the decrease was a result of negative currency effects which more than offset the increased margin from higher volumes and pricing. The increase for the year-to-date period came primarily from higher volumes and price, partially offset by negative currency effects. Gross margin as a percentage of sales for the second quarter and year-to-date periods increased modestly versus the prior year. Excluding the effect of lower cost pass-through on sales, the gross margin percentage was modestly below the prior-year for the quarter and six months.

Selling, general and administrative (SG&A) expenses increased $1 million for the second quarter and $28 million, or 5%, for the six months ended June 30, 2012 versus the respective 2011 periods. The increase was due primarily to increased pension and other benefit costs, incentive compensation and acquisitions, partially offset by negative currency effects.

Depreciation and amortization expense decreased $7 million, or 3%, for the second quarter and increased $1 million for the six months ended June 30, 2012 versus the respective 2011 periods. Excluding currency impacts, depreciation and amortization increased in both periods due to new project start-ups and acquisitions.

Other income (expense) – net was a $9 million and $23 million benefit for the quarter and six months ended June 30, 2012, respectively versus a $5 million expense and $6 million expense in the respective 2011 periods. The quarter and six month period included, among other items, a gain on a land sale in Korea and other asset sales, partially offset by severance and other charges. The year-to-date period also included a gain from litigation settlements in South America, partially offset by business restructuring costs in South America. The 2011 quarter and six-month periods included $1 million and $2 million of currency-related net losses, respectively, primarily related to net income hedges.

Operating profit increased $9 million, or 1%, for the second quarter and increased $45 million, or 4%, for the six months ended June 30, 2012 versus the respective 2011 periods. For the quarter, operating profit increased 9% excluding currency effects. Operating margin increased slightly from the prior year periods. A discussion of operating profit by segment is included in the segment discussion that follows.

Interest expense – net decreased $3 million, or 8%, for the second quarter and $1 million, or 1%, for the six months ended June 30, 2012 versus the respective periods in 2011 despite higher debt levels due to lower interest rates.

The effective tax rate for the second quarter 2012 was 28.0% versus 27.6% for the same period in 2011. The effective tax rate for the six months ended June 30, 2012 was 28.0% versus 27.8% for the same period in 2011.

Praxair’s significant sources of equity income are in China, Italy and the Middle East. Income from equity investments decreased $1 million in the second quarter and decreased $3 million for the six months ended June 30, 2012 versus the respective 2011 periods. This decrease relates to the acquisition of a controlling interest in an industrial gas business in Scandinavia in October 2011, which required consolidation. This decrease was partially offset by higher earnings from affiliates in Italy, the Middle East, and China.

At June 30, 2012, noncontrolling interests consisted primarily of noncontrolling shareholders’ investments in Asia (primarily in China and India), Europe (primarily in Italy and Scandinavia), and North America (primarily within

 

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the U.S. packaged gas business). Noncontrolling interests increased $1 million for the second quarter and increased $3 million for the six months ended June 30, 2012 versus the respective periods in 2011 due to higher earnings of these entities and the consolidation of the Scandinavian industrial gas business.

Net income – Praxair, Inc. increased $4 million, or 1%, for the second quarter and increased $25 million, or 3%, for the six months ended June 30, 2012 versus the respective periods in 2011. The increase was due primarily to higher operating profit and lower interest expense, partially offset by higher income taxes.

EPS increased $0.04 per diluted share, or 3%, for the second quarter and increased $0.13 per diluted share, or 5%, for the six months ended June 30, 2012 versus the respective periods in 2011. The increase in EPS is attributable to an increase in net income – Praxair, Inc. coupled with a lower number of diluted shares outstanding due to the impact of the company’s net repurchases of common stock.

Comprehensive income for the 2012 quarter includes a negative currency translation adjustment of $548 million reflecting the impact of translating foreign subsidiary balance sheets to US Dollars using exchange rates at June 30, 2012. The impact is negative because the US Dollar strengthened significantly against almost all foreign currencies during the quarter, primarily the Brazilian Real and Euro. For the six months, the currency translation adjustment impact was a negative $276 million.

Segment Discussion

The following summary of sales and operating profit by segment provides a basis for the discussion that follows.

 

     Quarter ended June 30,     Six Months Ended June 30,  
(Dollar amounts in millions)    2012      2011 (a)      Variance     2012      2011 (a)      Variance  

SALES

                

North America

   $ 1,393       $ 1,361         2   $ 2,791       $ 2,686         4

Europe

     382         370         3     759         715         6

South America

     520         611         (15 )%      1,082         1,169         (7 )% 

Asia

     348         348         —       682         665         3

Surface Technologies

     168         168         —       337         325         4
  

 

 

    

 

 

      

 

 

    

 

 

    
   $ 2,811       $ 2,858         $ 5,651       $ 5,560      
  

 

 

    

 

 

      

 

 

    

 

 

    

OPERATING PROFIT

                

North America

   $ 363       $ 326         11   $ 724       $ 638         13

Europe

     68         72         (6 )%      136         140         (3 )% 

South America

     110         139         (21 )%      225         272         (17 )% 

Asia

     68         63         8     125         116         8

Surface Technologies

     27         27         —       53         52         2
  

 

 

    

 

 

      

 

 

    

 

 

    

Total operating profit

   $ 636       $ 627         $ 1,263       $ 1,218      
  

 

 

    

 

 

      

 

 

    

 

 

    

 

a) During the 2012 first quarter, Praxair changed the measurement of its segment sales and operating profit. Prior period amounts have been reclassified to conform to the current year classification (See Note 11). These reclassified amounts are reflected in the segment tables below.

 

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North America

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     Variance     2012     2011     Variance  

Sales

   $ 1,393      $ 1,361        2   $ 2,791      $ 2,686        4

Cost of sales, exclusive of depreciation and amortization

     742        748          1,483        1,463     
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross margin

     651        613          1,308        1,223     

Operating expenses

     167        162          338        338     

Depreciation and amortization

     121        125          246        247     
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating profit

   $ 363      $ 326        11   $ 724      $ 638        13
  

 

 

   

 

 

     

 

 

   

 

 

   

Margin %

     26.1     24.0       25.9     23.8  

 

     2012 vs. 2011     2012 vs. 2011  
     % Change     % Change  
     Sales     Operating Profit     Sales     Operating Profit  

Factors Contributing to Changes

        

Volume

     4     6     6     10

Price

     2     8     2     9

Cost pass-through

     (4 )%      —       (3 )%      —  

Currency

     (2 )%      (3 )%      (2 )%      (2 )% 

Acquisitions/divestitures

     2     —       1     1

Other

     —       —       —       (5 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     2     11     4        13   
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables provide sales by end-market and distribution method:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % Change     % of Sales     % Change  
     2012     2011     Organic Sales     2012     2011     Organic Sales  

Sales by End Markets

            

Manufacturing

     33     29     12     32     28     12

Metals

     14     14     3     14     14     6

Energy

     16     16     21     16     16     21

Chemicals

     10     11     (6 )%      11     11     (2 )% 

Electronics

     5     6     (9 )%      5     6     (7 )% 

Healthcare

     7     8     (2 )%      7     9     (1 )% 

Food & Beverage

     5     5     (4 )%      5     5     —  

Other

     10     11     (1 )%      10     11     5
  

 

 

   

 

 

     

 

 

   

 

 

   
     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

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Table of Contents
     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % of Sales  
     2012     2011     2012     2011  

Sales by Distribution Method

        

On- Site

     27     28     27     28

Packaged Gas

     34     31     34     32

Merchant

     32     32     32     32

Other

     7     9     7     8
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment sales growth in the quarter and six month periods came from higher volumes and higher pricing, partially offset by negative currency effects and lower cost pass-through, primarily lower natural gas prices passed through to hydrogen customers. In the quarter, sales grew $32 million, or 8%, excluding currency and cost pass-through. Volumes increased 4% and pricing increased 2%. Acquisitions of packaged gas distributors increased sales by 2%. The effects of currency and cost pass-through reduced sales by 6%. For the six month period, sales increased $105 million, or 9%, excluding currency and cost pass-through. Volumes, pricing and acquisitions increased sales by 6%, 2% and 1%, respectively, and were partially offset by the effects of currency and cost pass-through which reduced sales by 5%.

Operating profit increased $37 million, or 11%, for the second quarter and increased $86 million, or 13%, for the six months ended June 30, 2012 versus the respective 2011 periods. Higher volumes, pricing and productivity savings drove the increase and more than offset inflationary cost increases and the negative impact of currency translation. The operating margin rose to 26.0% for the quarter and year-to-date periods. Lower cost pass-through which reduces sales with minimal impact on operating profit benefited operating margin by 1% in both the quarter and year-to-date periods.

Europe

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     Variance %     2012     2011     Variance %  

Sales

   $ 382      $ 370        3   $ 759      $ 715        6

Cost of sales, exclusive of depreciation and amortization

     217        213          430        412     
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross margin

     165        157          329        303     

Operating expenses

     60        51          118        96     

Depreciation and amortization

     37        34          75        67     
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating profit

   $ 68      $ 72        (6 )%    $ 136      $ 140        (3 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Margin %

     17.8     19.5       17.9     19.6  

 

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Table of Contents
     2012 vs. 2011     2012 vs. 2011  
     % Change     % Change     % Change     % Change  
     Sales     Operating Profit     Sales     Operating Profit  

Factors Contributing to Changes

        

Volume

     (2 )%      (9 )%      (2 )%      (8 )% 

Price

     2     4     1     3

Cost pass-through

     (1 )%      —       —          —     

Currency

     (9 )%      (8 )%      (6 )%      (6 )% 

Acquisitions/divestitures

     13     10     13     9

Other

     —       (3 )%      —       (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     3     (6 )%      6     (3 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

The following tables provide sales by end-market and distribution method:

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % Change
Organic  Sales
    % of Sales     % Change
Organic  Sales
 
     2012     2011       2012     2011    

Sales by End Markets

            

Manufacturing

     23     21     (3 )%      23     22     (3 )% 

Metals

     17     18     —       17     18     (3 )% 

Energy

     3     3     (15 )%      3     3     (10 )% 

Chemicals

     17     18     3     17     18     1

Electronics

     7     8     (15 )%      7     8     (19 )% 

Healthcare

     10     12     (9 )%      11     12     —  

Food & Beverage

     9     7     —       9     7     (4 )% 

Other

     14     13     9     13     12     9
  

 

 

   

 

 

     

 

 

   

 

 

   
     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     % of Sales     % of Sales  
     2012     2011     2012     2011  

Sales by Distribution Method

        

On- Site

     19     21     20     21

Packaged Gas

     43     41     42     41

Merchant

     33     31     33     31

Other

     5     7     5     7
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment sales increased $12 million, or 3%, for the second quarter and increased $44 million, or 6%, for the six months ended June 30, 2012 versus the respective 2011 periods. The increase was due to the acquisition of an increased ownership interest in Yara Praxair Holding AS (Yara Praxair) in October 2011 which required consolidation. In the quarter underlying sales were comparable to the prior year, as 2% higher pricing offset lower volume. Volumes in Spain and Italy were below prior year quarter primarily attributable to packaged gases, where customer demand was weaker due to lower industrial economic activity. Negative currency impacts, primarily the

 

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weaker Euro, reduced sales by 9%. For the six-month period underlying sales were comparable to the prior year as improved pricing partially offset lower volume. Volumes in Spain and Italy were below the prior year comparable period primarily due to packaged gases, where customer demand was weaker due to lower industrial economic activity.

Operating profit decreased by $4 million, or 6%, for the second quarter and $4 million, or 3% for the six months ended June 30, 2012 versus the respective 2011 periods. Excluding the Yara Praxair acquisition and the negative currency impact, underlying operating profit decreased primarily driven by lower volumes. Volumes decreased operating profit by 9% for the second quarter and 8% for the six month period, partially offset by higher pricing. Operating margins were below the prior-year period. Excluding the impact of currency, depreciation increased $5 million and $11 million for the quarter and six-months period ended June 30, 2012, respectively, due primarily to the acquisition of Yara Praxair and the start up of a plant in Germany.

South America

 

     Quarter Ended June 30,     Six Months Ended June 30,  
     2012     2011     Variance     2012     2011     Variance  

Sales

   $ 520      $ 611        (15 )%    $ 1,082      $ 1,169        (7 )% 

Cost of sales, exclusive of depreciation and amortization

     300        340          627        650     
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross margin

     220        271          455        519     

Operating expenses

     64        80          136        148     

Depreciation and amortization

     46        52          94        99     
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating profit

   $ 110      $ 139        (21 )%    $ 225      $ 272        (17 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Margin %

     21.2     22.7       20.8     23.3  

 

     2012 vs. 2011     2012 vs. 2011  
     % Change     % Change     % Change     % Change  
     Sales     Operating Profit     Sales     Operating Profit  

Factors Contributing to Changes

        

Volume

     (1 )%      —       —       —  

Price

     2