XNYS:PX Praxair Inc Quarterly Report 10-Q Filing - 9/30/2012

Effective Date 9/30/2012

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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 September 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 September 30, 2012, 297,126,439 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 September 30, 2012 and 2011
(Unaudited)

     1   
 

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

     2   
 

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

     3   
 

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

     3   
 

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

     4   
 

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

     5   
  Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited)      6   

Item 2.

  Management’s Discussion and Analysis of Financial Condition and Results of Operations      28   

Item 3.

  Quantitative and Qualitative Disclosures about Market Risk      53   

Item 4.

  Controls and Procedures      53   

PART II - OTHER INFORMATION

  

Item 1.

  Legal Proceedings      54   

Item 1A.

  Risk Factors      54   

Item 2.

  Unregistered Sales of Equity Securities and Use of Proceeds      58   

Item 3.

  Defaults Upon Senior Securities      59   

Item 4.

  Mine Safety Disclosures      59   

Item 5.

  Other Information      59   

Item 6.

  Exhibits      59   

Signature

       60   


Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(Millions of dollars, except per share data)

(UNAUDITED)

 

     Quarter Ended September 30,  
     2012     2011  

SALES

   $ 2,774      $ 2,896   

Cost of sales, exclusive of depreciation and amortization

     1,595        1,684   

Selling, general and administrative

     306        307   

Depreciation and amortization

     248        256   

Research and development

     24        22   

Cost reduction program and other charges

     65        —     

Other income (expense) - net

     22        5   
  

 

 

   

 

 

 

OPERATING PROFIT

     558        632   

Interest expense - net

     36        36   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS

     522        596   

Income taxes

     90        166   
  

 

 

   

 

 

 

INCOME BEFORE EQUITY INVESTMENTS

     432        430   

Income from equity investments

     8        13   
  

 

 

   

 

 

 

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

     440        443   

Less: noncontrolling interests

     (10     (14
  

 

 

   

 

 

 

NET INCOME - PRAXAIR, INC.

   $ 430      $ 429   
  

 

 

   

 

 

 

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS

    

Basic earnings per share

   $ 1.44      $ 1.42   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 1.43      $ 1.40   
  

 

 

   

 

 

 

Cash dividends per share

   $ 0.55      $ 0.50   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):

    

Basic shares outstanding

     298,416        301,594   

Diluted shares outstanding

     301,731        305,623   

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)

 

     Nine Months Ended September 30,  
     2012     2011  

SALES

   $ 8,425      $ 8,456   

Cost of sales, exclusive of depreciation and amortization

     4,813        4,860   

Selling, general and administrative

     951        924   

Depreciation and amortization

     747        754   

Research and development

     73        67   

Cost reduction program and other charges

     65        —     

Other income (expense) - net

     45        (1
  

 

 

   

 

 

 

OPERATING PROFIT

     1,821        1,850   

Interest expense - net

     106        107   
  

 

 

   

 

 

 

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS

     1,715        1,743   

Income taxes

     424        485   
  

 

 

   

 

 

 

INCOME BEFORE EQUITY INVESTMENTS

     1,291        1,258   

Income from equity investments

     25        33   
  

 

 

   

 

 

 

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

     1,316        1,291   

Less: noncontrolling interests

     (38     (39
  

 

 

   

 

 

 

NET INCOME - PRAXAIR, INC.

   $ 1,278      $ 1,252   
  

 

 

   

 

 

 

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS

    

Basic earnings per share

   $ 4.28      $ 4.13   
  

 

 

   

 

 

 

Diluted earnings per share

   $ 4.23      $ 4.07   
  

 

 

   

 

 

 

Cash dividends per share

   $ 1.65      $ 1.50   
  

 

 

   

 

 

 

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):

    

Basic shares outstanding

     298,793        303,125   

Diluted shares outstanding

     302,352        307,581   

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 September 30,  
     2012     2011  

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

   $ 440      $ 443   

OTHER COMPREHENSIVE INCOME (LOSS) (Net of Tax)

    

Translation adjustments (Note 13)

     245        (718

Derivative instruments (Note 5)

     (5     (8

Funded status - retirement obligations (Note 10)

     6        7   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)

     686        (276

Less: noncontrolling interests

     (17     (2
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.

   $ 669      $ (278
  

 

 

   

 

 

 
     Nine Months Ended September 30,  
     2012     2011  

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)

   $ 1,316      $ 1,291   

OTHER COMPREHENSIVE INCOME (LOSS) (Net of Tax)

    

Translation adjustments (Note 13)

     (31     (355

Derivative instruments (Note 5)

     —          (8

Funded status - retirement obligations (Note 10)

     22        12   
  

 

 

   

 

 

 

COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)

     1,307        940   

Less: noncontrolling interests

     (36     (42
  

 

 

   

 

 

 

COMPREHENSIVE INCOME - PRAXAIR, INC.

   $ 1,271      $ 898   
  

 

 

   

 

 

 

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

 

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Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Dollar amounts in millions)

(UNAUDITED)

 

     September 30, 2012     December 31, 2011  

ASSETS

    

Cash and cash equivalents

   $ 108      $ 90   

Accounts receivable - net

     1,901        1,795   

Inventories

     483        456   

Prepaid and other current assets

     361        266   
  

 

 

   

 

 

 

TOTAL CURRENT ASSETS

     2,853        2,607   

Property, plant and equipment (less accumulated depreciation of $11,056 in 2012 and $10,497 in 2011)

     11,074        10,131   

Goodwill

     2,381        2,372   

Other intangible assets - net

     146        167   

Other long-term assets

     1,185        1,079   
  

 

 

   

 

 

 

TOTAL ASSETS

   $ 17,639      $ 16,356   
  

 

 

   

 

 

 

LIABILITIES AND EQUITY

    

Accounts payable

   $ 919      $ 896   

Short-term debt

     587        337   

Current portion of long-term debt

     160        387   

Other current liabilities

     882        915   
  

 

 

   

 

 

 

TOTAL CURRENT LIABILITIES

     2,548        2,535   

Long-term debt

     6,389        5,838   

Other long-term liabilities

     2,113        1,966   
  

 

 

   

 

 

 

TOTAL LIABILITIES

     11,050        10,339   
  

 

 

   

 

 

 

Commitments and contingencies (Note 11)

    

Redeemable noncontrolling interests (Note 13)

     243        220   

Praxair, Inc. Shareholders’ Equity:

    

Common stock $0.01 par value, authorized - 800,000,000 shares, issued 2012 - 383,022,847 shares and 2011 - 382,854,272 shares

     4        4   

Additional paid-in capital

     3,862        3,809   

Retained earnings

     9,285        8,510   

Accumulated other comprehensive income (loss)

     (1,753     (1,746

Treasury stock, at cost (2012 - 85,896,408 shares and 2011 - 84,324,255 shares)

     (5,383     (5,089
  

 

 

   

 

 

 

Total Praxair, Inc. Shareholders’ Equity

     6,015        5,488   

Noncontrolling interests

     331        309   
  

 

 

   

 

 

 

TOTAL EQUITY

     6,346        5,797   
  

 

 

   

 

 

 

TOTAL LIABILITIES AND EQUITY

   $ 17,639      $ 16,356   
  

 

 

   

 

 

 

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

 

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Table of Contents

PRAXAIR, INC. AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Millions of dollars)

(UNAUDITED)

 

     Nine Months Ended September 30,  
     2012     2011  

OPERATIONS

    

Net income - Praxair, Inc.

   $ 1,278      $ 1,252   

Noncontrolling interests

     38        39   
  

 

 

   

 

 

 

Net income (including noncontrolling interests)

     1,316        1,291   

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

    

Cost reduction program, net of payments

     52        —     

Depreciation and amortization

     747        754   

Deferred income taxes

     202        33   

Share-based compensation

     52        46   

Accounts receivable

     (107     (202

Inventory

     (30     (43

Prepaid and other current assets

     (106     (5

Payables and accruals

     (75     (48

Pension contributions

     (112     (87

Long-term assets, liabilities and other

     (66     (75
  

 

 

   

 

 

 

Net cash provided by operating activities

     1,873        1,664   
  

 

 

   

 

 

 

INVESTING

    

Capital expenditures

     (1,594     (1,225

Acquisitions, net of cash acquired

     (109     (99

Divestitures and asset sales

     77        40   
  

 

 

   

 

 

 

Net cash used for investing activities

     (1,626     (1,284
  

 

 

   

 

 

 

FINANCING

    

Short-term debt borrowings (repayments) - net

     243        101   

Long-term debt borrowings

     1,416        1,199   

Long-term debt repayments

     (1,076     (575

Issuances of common stock

     126        164   

Purchases of common stock

     (438     (758

Cash dividends - Praxair, Inc. shareholders

     (492     (453

Excess tax benefit on share-based compensation

     50        47   

Noncontrolling interest transactions and other

     (55     (4
  

 

 

   

 

 

 

Net cash (used for) provided by financing activities

     (226     (279
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

     (3     (15
  

 

 

   

 

 

 

Change in cash and cash equivalents

     18        86   

Cash and cash equivalents, beginning-of-period

     90        39   
  

 

 

   

 

 

 

Cash and cash equivalents, end-of-period

   $ 108      $ 125   
  

 

 

   

 

 

 

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. Cost Reduction Program and Other Charges

     8   

Note 3. Supplemental Information

     9   

Note 4. Debt

     10   

Note 5. Financial Instruments

     11   

Note 6. Fair Value Disclosures

     17   

Note 7. Earnings Per Share – Praxair, Inc. Shareholders

     18   

Note 8. Goodwill and Other Intangible Assets

     18   

Note 9. Share-Based Compensation

     19   

Note 10. Retirement Programs

     21   

Note 11. Commitments and Contingencies

     22   

Note 12. Segments

     24   

Note 13. Equity and Redeemable Noncontrolling Interests

     25   

Note 14. Income Taxes

     27   

 

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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 8.

 

   

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 6 for the additional guidance, as applicable.

 

   

Testing Indefinite-Lived Intangible Assets for Impairment - In July 2012, the FASB issued updated guidance on the testing of indefinite-lived intangible assets for impairment. This guidance provides companies with the option to apply a qualitative approach to determine if it is more-likely-than-not that the asset might be impaired and whether it is necessary to perform a quantitative test. Early adoption is permitted and did not have an impact on Praxair’s consolidated financial statements.

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. Cost Reduction Program and Other Charges - Net

The quarter and nine months ended September 30, 2012 include the following items which are recorded in the condensed consolidated financial statements:

 

(Millions of dollars)    Operating
Loss
    Income Tax
Benefit
    Noncontrolling
Interests
    Net Income
(Loss) – Praxair,
Inc.
 

Cost reduction program

   ($ 56   ($ 16   ($ 2   ($ 38

Pension settlement charge

     (9     (3     —          (6

Income tax benefit

     —          (55     —          55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   ($ 65   ($ 74   ($ 2   $ 11   
  

 

 

   

 

 

   

 

 

   

 

 

 

Cost Reduction Program

In the third quarter of 2012, Praxair recorded pre-tax charges totaling $56 million ($38 million after-tax and noncontrolling interest), relating to severance and business restructuring actions primarily in Europe within the industrial gases and surface technologies businesses. The cost reduction program was initiated primarily in response to the continuing economic downturn in Europe.

The following is a summary of the charges by reportable segment:

 

(Millions of dollars)    Severance
Costs
     Costs Associated
with Exit or
Disposal
Activities
     Total Cost
Reduction
Program
 

North America

   $ 1       $ —         $ 1   

Europe

     28         8         36   

South America

     1         —           1   

Asia

     2         —           2   

Surface Technologies

     11         5         16   
  

 

 

    

 

 

    

 

 

 

Total

   $ 43       $ 13       $ 56   
  

 

 

    

 

 

    

 

 

 

The severance costs of $43 million are for the termination of approximately 410 employees, primarily in Europe (industrial gases and surface technologies) of which approximately 65 have been terminated as of September 30, 2012. The remaining employees are expected to be terminated in the next twelve months. These actions reflect the continued business slow-down in Europe and result from a decision to eliminate and/or restructure operations and product lines.

The costs associated with exit or disposal activities of $13 million include asset write-downs and other costs associated with a decision to eliminate and/or restructure operations and product lines. In Europe the costs primarily relate to the elimination and consolidation of operations in Spain. In Surface Technologies, the costs relate to the consolidation/rationalization of operations and product lines, primarily in Germany and Italy.

The following table summarizes the activities related to the third quarter 2012:

 

(Millions of dollars)    Severance
Costs
    Costs Associated
with Exit or
Disposal
Activities
    Total Cost
Reduction
Program
 

Cost reduction program

   $ 43      $ 13      $ 56   

Less: Cash payments

     (4     —          (4

Less: Non-cash asset write-offs

     —          (9     (9

Foreign currency translation

     1        —          1   
  

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 40      $ 4      $ 44   
  

 

 

   

 

 

   

 

 

 

 

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Table of Contents

Pension Settlement Charge

During 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. Accordingly, Praxair recorded a settlement charge related to net unrecognized actuarial losses of $9 million ($6 million after-tax) in July 2012 when cash payments were made.

Income Tax Benefit

In 2011 Praxair requested a pre-filing agreement (“PFA”) with the U.S. Internal Revenue Service (“IRS”) related to a loss on a liquidated subsidiary resulting from the divestiture of the U.S. Homecare Business. During the third quarter of 2012, the IRS approved the PFA resulting in a net income tax benefit of $55 million.

Classification in the consolidated financial statements

The $65 million of operating loss from the cost reduction program and pension settlement is shown as a separate line item on the consolidated statements of income. The $74 million tax benefit resulting from the pre-filing agreement, cost reduction program and pension settlement charge is reflected in income taxes. In the balance sheets, asset write-offs are recorded as a reduction to the carrying value of the related assets and unpaid amounts are recorded as short-term liabilities. As of September 30, 2012, there is a short-term liability of $44 million which is anticipated to be paid during the next 12-month period. On the consolidated statement of cash flows, the pre-tax loss from the cost reduction program, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 12, Praxair excluded these items in its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the operating profit table.

3. Supplemental Information

Inventories

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

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

Inventories

     

Raw materials and supplies

   $ 165       $ 153   

Work in process

     63         58   

Finished goods

     255         245   
  

 

 

    

 

 

 

Total inventories

   $ 483       $ 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 $47 million and $53 million at September 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.

 

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Table of Contents

4. Debt

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

 

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

SHORT-TERM

    

Commercial paper and U.S. bank borrowings

   $ 466      $ 159   

Other bank borrowings (primarily international)

     121        178   
  

 

 

   

 

 

 

Total short-term debt

     587        337   
  

 

 

   

 

 

 

LONG-TERM

    

U.S. borrowings

    

Commercial paper

       —     

6.375% Notes due 2012 (e)

     —          501   

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

     401        405   

3.95% Notes due 2013 (d)

     350        350   

2.125% Notes due 2013(a, b, d)

     506        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)

     431        434   

5.375% Notes due 2016

     400        400   

5.20% Notes due 2017

     325        325   

4.50% Notes due 2019(a)

     598        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        —     

2.20% Notes due 2022(a, c)

     499        —     

Other

     5        6   
    

International bank borrowings

     233        490   

Obligations under capital leases

     10        11   
  

 

 

   

 

 

 
     6,549        6,225   

Less: current portion of long-term debt

     (160     (387
  

 

 

   

 

 

 

Total long-term debt

     6,389        5,838   
  

 

 

   

 

 

 

Total debt

   $ 7,136      $ 6,562   
  

 

 

   

 

 

 

 

(a) Amounts are net of unamortized discounts.
(b) September 30, 2012 and December 31, 2011 include a $39 million and $54 million fair value increase, respectively, related to hedge accounting. See Note 5 for additional information.
(c) For the nine months ended September 30, 2012, Praxair issued the following notes totaling $1.1 billion: $600 million of 2.45% notes due 2022 and $500 million of 2.20% notes due 2022. The proceeds of both issuances 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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5. 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 September 30, 2012 and December 31, 2011:

 

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

Derivatives Not Designated as Hedging Instruments:

                 

Currency contracts:

                 

Balance sheet items (a)

   $ 1,902       $ 1,541       $ —         $ 2       $ 4       $ 2   

Derivatives Designated as Hedging Instruments:

                 

Currency contracts:

                 

Forecasted purchases (a)

   $ 16       $ 59       $ —         $ —         $ —         $ 2   

Interest rate contracts:

                 

Interest rate swaps (b)

     400         400         32         35         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ 416       $ 459       $ 32       $ 35       $ —         $ 2   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Derivatives

   $ 2,318       $ 2,000       $ 32       $ 37       $ 4       $ 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 September 30, 2012 and December 31, 2011, such derivatives were outstanding during the nine month periods ended September 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 September 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 September 30, 2012, $32 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      Nine Months Ended      September  30,
2012
     December  31,
2011
 
(Millions of Dollars)          September 30,
2012
     September 30,
2011
     September 30,
2012
     September 30,
2011
       

Interest Rate Swaps

                       

Underlying debt instrument (b):

                       

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

     2011       $ 18       $ 2       $ 1       $ 7       $ 1       $ 6       $ 13   

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

     2010         13         1         2         4         3         1         5   

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

     2002         47         —           1         1         2         —           1   
     

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total

      $ 78       $ 3       $ 4       $ 12       $ 6       $ 7       $ 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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Terminated Treasury Rate Locks

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

 

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

Treasury Rate Locks

         

Underlying debt instrument:

         

$500 million 2.20% fixed-rate notes that mature in 2022 (b)

     2012       $ (2     (2     —     

$500 million 3.00% fixed-rate notes that mature in 2021 (b)

     2011       $ (11     (10     (11

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

     2009         16        11        12   

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

     2008         (7     (2     (3
       

 

 

   

 

 

 

Total - pre-tax

        $ (3   $ (2

Less: income taxes

          1        1   
       

 

 

   

 

 

 

After- tax amounts

        $ (2   $ (1
       

 

 

   

 

 

 

 

(a) The unrecognized gains / (losses) for the treasury rate locks are shown in accumulated other comprehensive income (“AOCI”) and are being recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements. The cash received or paid was 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) 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.

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
September  30,
    Nine Months  Ended
September 30,
 
(Millions of dollars)    2012      2011     2012     2011  

Derivatives Not Designated as Hedging Instruments

         

Currency contracts:

         

Balance sheet items

         

Debt-related

   $ 29       $ (10   $ 47      $ (16

Other balance sheet items

     —           (9     (5     (4

Anticipated net income

     —           6        (4     1   
  

 

 

    

 

 

   

 

 

   

 

 

 

Total

   $ 29       $ (13   $ 38      $ (19
  

 

 

    

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     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)    September 30,
2012
    September 30,
2011
    September 30,
2012
     September 30,
2011
     September 30,
2012
    September 30,
2011
 

Derivatives Designated as Hedging Instruments

              

Currency contracts:

              

Forecasted purchases (b)

   $ 1      $ (1   $ —         $ —         $ 1      $ (1

Interest rate contracts:

              

Treasury rate locks (b)

     (8     (11     —           —           (8     (11
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total - pre tax

   $ (7   $ (12   $ —         $ —         $ (7   $ (12

Less: income taxes

     2        4        —           —           2        4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total - Net of Taxes

   $ (5   $ (8   $ —         $ —         $ (5   $ (8
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

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Table of Contents
     Nine 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)    September 30,
2012
    September 30,
2011
    September 30,
2012
     September 30,
2011
     September 30,
2012
    September 30,
2011
 

Derivatives Designated as Hedging Instruments

              

Currency contracts:

              

Forecasted purchases (b)

   $ 1      $ (1   $ —         $ —         $ 1      $ (1

Interest rate contracts:

              

Treasury rate locks (b)

     (1     (11     —           —           (1     (11
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total - pre tax

   $ —        $ (12   $ —         $ —         $ —        $ (12

Less: income taxes

     —          4        —           —           —          4   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

Total - Net of Taxes

   $ —        $ (8   $ —         $ —         $ —        $ (8
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

   

 

 

 

 

(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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Table of Contents

6. 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)    September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
     September 30,
2012
     December 31,
2011
 

Assets

                 

Derivatives

     —           —         $ 32       $ 37         —           —     
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Liabilities

                 

Derivatives

     —           —         $ 4       $ 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 September 30, 2012, the estimated fair value of Praxair’s long-term debt portfolio was $7,019 million versus a carrying value of $6,549 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

7. 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
September 30,
     Nine Months Ended
September 30,
 
     2012      2011      2012      2011  

Numerator (Millions of dollars)

           

Net income - Praxair, Inc.

   $ 430       $ 429       $ 1,278       $ 1,252   
  

 

 

    

 

 

    

 

 

    

 

 

 

Denominator (Thousands of shares)

           

Weighted average shares outstanding

     297,843         300,966         298,224         302,499   

Shares earned and issuable under compensation plans

     573         628         569         626   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used in basic earnings per share

     298,416         301,594         298,793         303,125   

Effect of dilutive securities

           

Stock options and awards

     3,315         4,029         3,559         4,456   
  

 

 

    

 

 

    

 

 

    

 

 

 

Weighted average shares used in diluted earnings per share

     301,731         305,623         302,352         307,581   
  

 

 

    

 

 

    

 

 

    

 

 

 

Basic Earnings Per Share

   $ 1.44       $ 1.42       $ 4.28       $ 4.13   

Diluted Earnings Per Share

   $ 1.43       $ 1.40       $ 4.23       $ 4.07   

Stock options of 1,601,765 and 1,594,165 were antidilutive and therefore excluded in the computation of diluted earnings per share for the quarter and nine months ended September 30, 2012. There were no antidilutive shares for the quarter and nine months ended September 30, 2011.

8. Goodwill and Other Intangible Assets

Changes in the carrying amount of goodwill for the nine months ended September 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

     12        —          1         —           —           13   

Purchase adjustments & other

     (9     —          —           —           —           (9

Foreign currency translation

     15        (19     8         —           1         5   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

Balance, September 30, 2012

   $ 1,393      $ 196      $ 627       $ 24       $ 141       $ 2,381   
  

 

 

   

 

 

   

 

 

    

 

 

    

 

 

    

 

 

 

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 during the second 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. There were no indicators of impairment through September 30, 2012.

 

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Table of Contents

Changes in the carrying amounts of other intangibles for the nine months ended September 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

     14        2        —          16   

Foreign currency translation

     2        —          1        3   

Other

     (22     (5     (6     (33
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ 202      $ 34      $ 22      $ 258   
  

 

 

   

 

 

   

 

 

   

 

 

 

Less: Accumulated amortization

        

Balance, December 31, 2011

   $ (75   $ (20   $ (10   $ (105

Amortization expense

     (10     (4     (1     (15

Foreign currency translation

     (1     —          —          (1

Other

     3        5        1        9   
  

 

 

   

 

 

   

 

 

   

 

 

 

Balance, September 30, 2012

   $ (83   $ (19   $ (10   $ (112
  

 

 

   

 

 

   

 

 

   

 

 

 

Net balance at September 30, 2012

   $ 119      $ 15      $ 12      $ 146   
  

 

 

   

 

 

   

 

 

   

 

 

 

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

Total estimated annual amortization expense is as follows:

 

(Millions of dollars)       

Remaining 2012

   $ 6   

2013

     21   

2014

     19   

2015

     18   

2016

     17   

Thereafter

     65   
  

 

 

 
   $ 146   
  

 

 

 

9. Share-Based Compensation

Share-based compensation of $17 million ($12 million after-tax) and $16 million ($11 million after-tax) was recognized during the quarters ended September 30, 2012 and 2011, respectively. Share-based compensation of $52 million ($36 million after-tax) and $46 million ($32 million after-tax) was recognized for the nine months ended September 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 nine months ended September 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 :

 

     Nine Months Ended September 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 September 30, 2012 and changes during the nine 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

     (2,174     51.92         

Cancelled or Expired

     (63     101.78         
  

 

 

         

Outstanding at September 30, 2012

     12,953        73.02         5.7       $ 400   
  

 

 

   

 

 

    

 

 

    

 

 

 

Exercisable at September 30, 2012

     9,855      $ 64.23         4.8       $ 391   
  

 

 

   

 

 

    

 

 

    

 

 

 

The aggregate intrinsic value represents the difference between the company’s closing stock price of $103.88 as of September 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 nine months ended September 30, 2012 was $15 million and $129 million, respectively ($18 million and $165 million during the same time periods in 2011, respectively).

Cash received from option exercises under all share-based payment arrangements for the quarter and nine months ended September 30, 2012 was $15 million and $113 million ($18 million and $152 million for the same time periods in 2011, respectively). The cash tax benefit realized from share-based compensation totaled $7 million and $68 million for the quarter and nine months ended September 30, 2012, of which $50 million in excess tax benefits was classified as financing cash flows for the nine months ended September 30, 2012 ($5 million and $57 million tax benefit for the same periods 2011 of which $47 million represented excess tax benefit for the nine months ended September 30, 2011).

As of September 30, 2012, $32 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.

Performance-Based and Restricted Stock Awards

During the nine months ended September 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 nine months ended September 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 nine months ended September 30, 2012 was $103.13 and $103.81, respectively ($92.06 and $92.34 for the same period 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 September 30, 2012 and changes during the nine 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         110        103.81   

Vested

     (508     56.41         (99     63.27   

Cancelled

     (15     90.37         (12     83.83   
  

 

 

      

 

 

   

Non-vested at September 30, 2012

     842      $ 88.87         339      $ 88.12   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(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 September 30, 2012, based on current estimates of future performance, $36 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2015 and $16 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the second quarter of 2017.

10. Retirement Programs

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

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     Pensions     OPEB     Pensions     OPEB  
(Millions of dollars)    2012     2011     2012     2011     2012     2011     2012     2011  

Service cost

   $ 12      $ 11      $ 1      $ 1      $ 37      $ 33      $ 3      $ 3   

Interest cost

     30        31        3        4        91        94        9        12   

Expected return on plan assets

     (38     (38     —          —          (116     (114     —          —     

Net amortization and deferral

     17        12        (2     (2     51        35        (5     (6
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost before pension settlement charge

     21        16        2        3        63        48        7        9   

Pension settlement charge (Note 2)

     9        —          —          —          9        —          —          —     
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Net periodic benefit cost

   $ 30      $ 16      $ 2      $ 3      $ 72      $ 48      $ 7      $ 9   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Praxair estimates that 2012 contributions to its pension plans will be in the area of $120 million, of which $112 million have been made through September 30, 2012.

11. 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 September 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 $195 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.

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.

 

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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.

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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12. Segments

Sales and operating profit by segment for the quarters and nine-month periods ended September 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 September 30,      Nine Months Ended September 30,  
(Millions of dollars)    2012     2011 (b)      2012     2011 (b)  

SALES(a)

         

North America

   $ 1,391      $ 1,416       $ 4,182      $ 4,102   

Europe

     352        361         1,111        1,076   

South America

     516        607         1,598        1,776   

Asia

     358        349         1,040        1,014   

Surface Technologies

     157        163         494        488   
  

 

 

   

 

 

    

 

 

   

 

 

 
   $ 2,774      $ 2,896       $ 8,425      $ 8,456   
  

 

 

   

 

 

    

 

 

   

 

 

 

OPERATING PROFIT

         

North America

   $ 374      $ 340       $ 1,098      $ 978   

Europe

     60        68         196        208   

South America

     112        140         337        412   

Asia

     52        58         177        174   

Surface Technologies

     25        26         78        78   
  

 

 

   

 

 

    

 

 

   

 

 

 

Segment operating profit

     623        632         1,886        1,850   

Cost reduction program and other charges (Note 2)

     (65     —           (65     —     
  

 

 

   

 

 

    

 

 

   

 

 

 

Total operating profit

   $ 558      $ 632       $ 1,821      $ 1,850   
  

 

 

   

 

 

    

 

 

   

 

 

 

 

(a) Intersegment sales, primarily from North America to other segments, were not significant for the quarters and nine months ended September 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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13. Equity and Redeemable Noncontrolling Interests

Equity

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

 

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

Balance, beginning of period

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

Net income (b)

     430        5        435        429        14        443   

Translation adjustments

     238        7        245        (706     (12     (718

Derivative instruments, net of $2 million taxes in 2012 and $4 million taxes 2011

     (5     —          (5     (8     —          (8

Funded status - retirement obligations, net of $4 million in 2012 and $5 million taxes in 2011

     6        —          6        7        —          7   

Noncontrolling interests:

            

Additions (reductions) (a)

     —          45        45        —          —          —     

Dividends and other capital reductions

     —          (5     (5     —          (4     (4

Redemption value adjustments

     (5     —          (5     —          —          —     

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

     (164     —          (164     (150     —          (150

Issuances of common stock:

            

For the dividend reinvestment
and stock purchase plan

     3        —          3        2        —          2   

For employee savings and incentive
plans

     20        —          20        23        —          23   

Purchases of common stock

     (146     —          (146     (275     —          (275

Tax benefit from share-based compensation

     6        —          6        15        —          15   

Share-based compensation

     17        —          17        16        —          16   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 6,015      $ 331      $ 6,346      $ 5,753      $ 368      $ 6,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

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Table of Contents
     Nine Months Ended September 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)

     1,278        23        1,301        1,252        39        1,291   

Translation adjustments

     (29     (2     (31     (358     3        (355

Derivative instruments, net of less than $1 million taxes in 2012 and $4 million taxes in 2011

     —          —          —          (8     —          (8

Funded status - retirement obligations, net of $11 million taxes in 2012 and $1 million taxes in 2011

     22        —          22        12        —          12   

Noncontrolling interests:

            

Additions (reductions) (a)

     —          45        45        —          (1     (1

Dividends and other capital reductions

     —          (44     (44     —          (26     (26

Redemption value adjustments

     (11     —          (11     —          —          —     

Dividends to Praxair, Inc. common stock holders ($1.65 per share in 2012 and $1.50 per share in 2011)

     (492     —          (492     (453     —          (453

Issuances of common stock:

            

For the dividend reinvestment
and stock purchase plan

     6        —          6        6        —          6   

For employee savings and incentive
plans

     108        —          108        167        —          167   

Purchases of common stock

     (459     —          (459     (753     —          (753

Tax benefit from stock options

     52        —          52        50        —          50   

Share-based compensation

     52        —          52        46        —          46   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 6,015      $ 331      $ 6,346      $ 5,753      $ 368      $ 6,121   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(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 $15 million for the quarter and nine months ended September 30, 2012, respectively, which is not part of total equity (see below). There were no redeemable noncontrolling interests recorded at September 30, 2011.

The components of AOCI are as follows:

 

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

Cumulative translation adjustments (CTA)

   $ (1,088   $ (1,057

Derivative instruments

     (5     (5

Funded status - retirement obligations

     (662     (684
  

 

 

   

 

 

 
     (1,755     (1,746

Noncontrolling interests (CTA)

     2        —     
  

 

 

   

 

 

 

AOCI - Praxair, Inc.

   $ (1,753   $ (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 nine months ended September 30, 2012:

 

(Millions of dollars)       

Balance, December 31, 2011

   $ 220   

Net income

     15   

Distributions to noncontrolling interest

     (8

Redemption value adjustment/accretion

     11   

Foreign currency translation and other

     5   
  

 

 

 

Balance, September 30, 2012

   $ 243   
  

 

 

 

14. 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 as a result of the divestiture of the U.S. Homecare business. The PFA was settled during the third quarter of 2012. Refer to Note 2.

 

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

Adjusted Amounts and Comparisons

The discussion of consolidated results and outlook in this Management’s Discussion and Analysis (MD&A) as it relates to the quarter and nine month periods are based on adjusted amounts for 2012. The adjusted amounts for 2012 are non-GAAP measures that supplement an understanding of the company’s financial information by presenting information that investors, financial analysts and management use to help evaluate the company’s performance and ongoing business trends on a comparable basis. See the “Consolidated Results” section of this MD&A for a summary of these adjusted amounts. A reconciliation of reported amounts to adjusted amounts can be found in the “Non-GAAP Financial Measures” section of this MD&A.

Consolidated Results

Praxair’s sales in the third quarter were 4% below the prior-year quarter. Sales grew 4% from higher prices and acquisitions. This growth was offset by the negative effects of foreign currency translation due to the strengthening of the US dollar against most major currencies, and lower cost pass-through, primarily lower natural gas prices. Overall volumes were flat as compared to the prior year. Sales growth was strongest to metals and energy markets. Higher volumes in Asia from new plant start-ups were offset primarily by lower volumes in Europe and South America due to softer macroeconomic conditions, which reduced demand in those geographies from manufacturing and metals customers. Sales growth in North America was mitigated by lower cost pass-through and negative currency effects. North America volumes were flat as compared to prior year as weaker demand from electronics and chemicals customers was offset by growth in other markets. New project development activity continues to be strong in North America, South America, and Asia. Adjusted operating profit was 1% below the prior-year quarter. Excluding currency effects, adjusted operating profit grew 7% from price, productivity gains, acquisitions, and an increase in other income.

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

 

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

Reported Amounts

            

Sales

   $ 2,774      $ 2,896        (4 )%    $ 8,425      $ 8,456        (0 )% 

Cost of sales, exclusive of depreciation and amortization

   $ 1,595      $ 1,684        (5 )%    $ 4,813      $ 4,860        (1 )% 

Gross margin

   $ 1,179      $ 1,212        (3 )%    $ 3,612      $ 3,596        0

As a percent of sales

     42.5     41.9       42.9     42.5  

Selling, general and administrative

   $ 306      $ 307        —        $ 951      $ 924        3

As a percent of sales

     11.0     10.6       11.3     10.9  

Depreciation and amortization

   $ 248      $ 256        (3 )%    $ 747      $ 754        (1 )% 

Cost reduction program and other charges (a)

   $ 65      $ —          —        $ 65      $ —          —     

Other income (expense) - net

   $ 22      $ 5        $ 45      $ (1  

Operating profit

   $ 558      $ 632        (12 )%    $ 1,821      $ 1,850        (2 )% 

As a percent of sales

     20.1     21.8       21.6     21.9  

Interest expense - net

   $ 36      $ 36        —        $ 106      $ 107        (1 )% 

Effective tax rate

     17.2     27.9       24.7     27.8  

Income from equity investments

   $ 8      $ 13        (38 )%    $ 25      $ 33        (24 )% 

Noncontrolling interests

   $ (10   $ (14     (29 )%    $ (38   $ (39     (3 )% 

Net income - Praxair, Inc.

   $ 430      $ 429        —        $ 1,278      $ 1,252        2

Diluted earnings per share

   $ 1.43      $ 1.40        2   $ 4.23      $ 4.07        4

Diluted shares outstanding

     301,731        305,623        (1 )%      302,352        307,581        (2 )% 

Adjusted Amounts for 2012 (a,b)

            

Operating profit

   $ 623      $ 632        (1 )%    $ 1,886      $ 1,850        2

As a percent of sales

     22.5     21.8       22.4     21.9  

Effective tax rate

     27.9     27.9       28.0     27.8  

Noncontrolling interests

   $ (12   $ (14     (14 )%    $ (40   $ (39     3

Net income - Praxair, Inc.

   $ 419      $ 429        (2 )%    $ 1,267      $ 1,252        1

Diluted earnings per share

   $ 1.39      $ 1.40        (1 )%    $ 4.19      $ 4.07        3

 

(a) See Note 2 to the condensed consolidated financial statements.
(b) Adjusted amounts for 2012 are non-GAAP measures and are presented to facilitate comparisons with 2011, which are not adjusted. Non-GAAP adjustments for 2012 are summarized below and a reconciliation of reported amounts to adjusted amounts can be found in the “Non-GAAP Financial Measures” section of this MD&A.

 

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The following items were recorded in the condensed consolidated financial statements and were excluded for adjusted amounts. See Note 2 to the condensed consolidated financial statements for a more detailed description of these items.

 

(Millions of dollars)    Operating
Loss
    Income Tax
Benefit
    Noncontrolling
Interests
    Net Income (Loss) –
Praxair, Inc.
 

Cost reduction program

   $ (56   $ (16   $ (2   $ (38

Pension settlement Charge

     (9     (3     —          (6

Income tax benefit

     —          (55     —          55   
  

 

 

   

 

 

   

 

 

   

 

 

 

Total

   $ (65   $ (74   $ (2   $ 11   

Cost Reduction Program

In the third quarter 2012, Praxair recorded pre-tax charges totaling $56 million ($38 million after-tax and noncontrolling interest), relating to severance and business restructuring actions primarily in Europe within the industrial gases and surface technologies businesses. The cost reduction program was initiated primarily in response to the continuing economic downturn in Europe.

Pension Settlement Charge

During 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. Accordingly, Praxair recorded a settlement charge related to net unrecognized actuarial losses of $9 million ($6 million after-tax) in July 2012 when cash payments were made.

Pre-filing Agreement

In 2011 Praxair requested a pre-filing agreement (“PFA”) with the U.S. Internal Revenue Service (“IRS”) related to a loss on a liquidated subsidiary resulting from the divestiture of the US Homecare Business. During the third quarter of 2012, the IRS approved the PFA resulting in a net income tax benefit of $55 million.

Results of Operations

As previously described, references to “adjusted” amounts refer to reported amounts adjusted to exclude the impact of special items and are non-GAAP measures. A reconciliation of reported amounts to adjusted amounts can be found in the “Non-GAAP Financial Measures” section of this MD&A.

 

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

 

     Quarter Ended September  30,
2012 vs. 2011
    Nine Months Ended
September 30, 2012 vs. 2011
 
     % Change     % Change  
     Sales     Adjusted
Operating Profit
    Sales     Adjusted
Operating Profit
 

Factors Contributing to Changes

        

Volume

     —       (4 )%      2     1

Price

     2     6     2     7

Cost pass-through

     (1 )%      —       (1 )%      —  

Currency

     (7 )%      (8 )%      (5 )%      (6 )% 

Acquisitions/divestitures

     2     2     2     1

Other

     —       3     —       (1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     (4 )%      (1 )%      —       2
  

 

 

   

 

 

   

 

 

   

 

 

 

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

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     % of Sales     % Change     % of Sales     % Change  
     2012     2011     Organic Sales*     2012     2011     Organic Sales*  

Sales by End Markets

            

Manufacturing

     25     24     3     25     24     6

Metals

     17     17     6     18     18     6

Energy

     12     12     5     11     11     13

Chemicals

     10     10     (3 )%      10     10     (1 )% 

Electronics

     9     9     (3 )%      9     9     (2 )% 

Healthcare

     8     8     6     8     9     6

Food & Beverage

     7     6     —       6     6     —  

Aerospace

     3     3     11     3     3     10

Other

     9     11     (10 )%      10     10     (4 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   
     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

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

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     % of Sales     % of Sales  
     2012     2011     2012     2011  

Sales by Distribution Method

        

On- Site

     26     25     25     25

Packaged Gas

     28     27     29     28

Merchant

     32     31     31     31

Other

     14     17     15     16
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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Sales declined $122 million, or 4%, for the third quarter and decreased $31 million for the nine months ended September 30, 2012, versus the respective 2011 periods. For the quarter, sales growth from higher pricing and acquisitions was offset by the negative effects of foreign currency translation and lower cost pass-through. Overall volumes were flat as compared to the prior year, as growth in Asia from new project start-ups was offset by lower volumes in other geographic segments, primarily Europe and South America, resulting from weaker macroeconomic conditions in those regions which curtailed customer demand. For the nine-month period, sales were comparable to the prior year. Underlying sales grew 4% from higher volumes and higher price. Acquisitions added 2% to sales growth. This growth was offset by negative currency translation effects and lower cost pass-through. By end-market, organic sales increased to energy, metals, manufacturing, and healthcare customers, for both the quarter and nine-month periods. Sales were lower to the chemical and electronics end-markets.

Gross margin decreased $33 million, or 3%, for the third quarter and increased $16 million for the year-to-date period, as compared to 2011. For the quarter, the decrease was primarily a result of negative currency effects which more than offset the increased margin from improved pricing. The increase for the year-to-date period came from higher volumes and price, largely offset by negative currency effects. Gross margin as a percentage of sales for the quarter and year-to-date periods increased modestly versus the respective prior year periods. Excluding the effect of lower cost pass-through, the gross margin percentage was comparable to the prior-year periods.

Selling, general and administrative expenses decreased $1 million for the quarter and increased $27 million for the nine-month period, as compared to 2011. The increase for the nine-month period is due to higher pension and benefit costs, and acquisitions, partially offset by negative currency effects.

Depreciation and amortization expense decreased $8 million for the quarter and $7 million for the nine months. In both periods, higher expense due to new plant start-ups and acquisitions was offset by currency impacts.

Other income (expense) – net was $22 million and $45 million benefit for the quarter and nine-month period, respectively, versus a $5 million benefit and $1 million expense in the respective 2011 periods. The quarter included, among other items, a gain on asset sale in North America, partially offset by other expenses. The nine-month period also included a gain on an asset sale in Korea, and a litigation settlement in South America, partially offset by severance and business restructuring charges in South America.

Adjusted operating profit decreased $9 million for the quarter and increased $36 million for the year-to-date period, versus 2011. Excluding currency effects, adjusted operating profit grew 7% for the quarter and 8% for the nine months as compared to the prior year from higher pricing and productivity. A discussion of operating profit by segment is included in the segment discussion that follows.

Interest expense-net is flat with the prior year for both the quarter and nine-month period despite higher debt levels due to lower interest rates.

The adjusted effective tax rate was 27.9% in both the third quarters of 2012 and 2011. For the 2012 year-to-date period, the adjusted effective tax rate was 28.0%, versus 27.8% in the respective 2011 period.

Praxair’s significant sources of equity income are in China, Italy, and the Middle East. Income from equity investments decreased $5 million for the quarter and $8 million for the nine months due primarily to the acquisition in 2011 of a controlling interest in an industrial gas business in Scandinavia, which required consolidation.

At September 30, adjusted non-controlling interests consisted primarily of non-controlling shareholders’ investments in Asia (primarily China and India), Europe (primarily Italy and Scandinavia), and North America (primarily within the US packaged gas business). Adjusted non-controlling interests decreased $2 million for the quarter and increased $1 million for the nine- month period versus the respective periods in 2011 due to lower earnings of these entities, including currency effects, which offset the consolidation of the Scandinavian business.

Adjusted net income-Praxair, Inc. decreased $10 million, or 2%, for the quarter due to lower operating profit. For the nine-month period, adjusted net income increased $15 million, or 1%. Adjusted EPS of $1.39 for the quarter compares to $1.40 in the 2011 quarter. Adjusted EPS is 1% below prior year, due to lower net income, partially offset by a lower outstanding diluted share count due to the company’s net repurchase of common stock. For the nine months, adjusted EPS of $4.19 is 3% above the prior year of $4.07.

 

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Comprehensive income of $669 million includes a positive currency adjustment of $245 million, reflecting the impact of translating foreign subsidiary balance sheets to U.S. dollars using exchange rates as of September 30, 2012. In the 2011 quarter, this currency impact was a negative $718 million. For the nine-month period in 2012, the currency translation impact is not significant.

Segment Discussion

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

 

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

SALES

              

North America

   $ 1,391      $ 1,416         (2 )%    $ 4,182      $ 4,102         2

Europe

     352        361         (2 )%      1,111        1,076         3

South America

     516        607         (15 )%      1,598        1,776         (10 )% 

Asia

     358        349         3     1,040        1,014         3

Surface Technologies

     157        163         (4 )%      494        488         1
  

 

 

   

 

 

      

 

 

   

 

 

    
   $ 2,774      $ 2,896         $ 8,425      $ 8,456      
  

 

 

   

 

 

      

 

 

   

 

 

    

OPERATING PROFIT

              

North America

   $ 374      $ 340         10   $ 1,098      $ 978         12

Europe

     60        68         (12 )%      196        208         (6 )% 

South America

     112        140         (20 )%      337        412         (18 )% 

Asia

     52        58         (10 )%      177        174         2

Surface Technologies

     25        26         (4 )%      78        78         —  
  

 

 

   

 

 

      

 

 

   

 

 

    

Segment operating profit

     623        632         (1 )%      1,886        1,850         2

Cost reduction program and other charges (Note 2)

     (65     —             (65     —        
  

 

 

   

 

 

      

 

 

   

 

 

    

Total operating profit

   $ 558      $ 632         $ 1,821      $ 1,850      
  

 

 

   

 

 

      

 

 

   

 

 

    

 

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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Table of Contents

North America

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2012     2011     Variance     2012     2011     Variance  

Sales

   $ 1,391      $ 1,416        (2 )%    $ 4,182      $ 4,102        2

Cost of sales, exclusive of depreciation and amortization

     743        791          2,226        2,254     
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross margin

     648        625          1,956        1,848     

Operating expenses

     149        161          487        499     

Depreciation and amortization

     125        124          371        371     
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating profit

   $ 374      $ 340        10   $ 1,098      $ 978        12
  

 

 

   

 

 

     

 

 

   

 

 

   

Margin %

     26.9     24.0       26.3     23.8  

 

     Quarter Ended September 30,
2012 vs. 2011
    Nine Months Ended September  30,
2012 vs. 2011
 
     % Change     % Change  
     Sales     Operating Profit     Sales     Operating Profit  

Factors Contributing to Changes

        

Volume

     —       —       4     7

Price

     2     7     2     8

Cost pass-through

     (4 )%      —       (3 )%      —  

Currency

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

Acquisitions/divestitures

     2     1     1     1

Other

     —       4     —       (2 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 
     (2 )%      10     2     12
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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

 

     Quarter Ended September 30,     Nine Months Ended
September 30,
 
     % of Sales     % Change     % of Sales     % Change  
     2012     2011     Organic Sales     2012     2011     Organic Sales  

Sales by End Markets

            

Manufacturing

     32     29     7     32     29     10

Metals

     13     13     5     14     13     6

Energy

     17     19     6     16     18     15

Chemicals

     10     11     (10 )%      11     11     (5 )% 

Electronics

     5     6     (15 )%      5     6     (10 )% 

Healthcare

     7     7     (1 )%      7     8     (1 )% 

Food & Beverage

     5     5     (2 )%      5     5     (1 )% 

Aerospace

     1     1     7     1     1        1

Other

     10     9     (7 )%      9     9     1
  

 

 

   

 

 

     

 

 

   

 

 

   
     100     100       100     100  
  

 

 

   

 

 

     

 

 

   

 

 

   

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     % of Sales     % of Sales  
     2012     2011     2012     2011  

Sales by Distribution Method

        

On- Site

     27     29     27     28

Packaged Gas

     34     30     34     31

Merchant

     33     32     32     32

Other

     6     9     7     9
  

 

 

   

 

 

   

 

 

   

 

 

 
     100     100     100     100
  

 

 

   

 

 

   

 

 

   

 

 

 

Segment sales decreased $25 million, or 2%, for the third quarter and increased $80 million, or 2%, for the nine months ended September 30, 2012 versus the respective 2011 periods. In the quarter, sales grew $53 million, or 4%, due to increased pricing and acquisitions of packaged gas distributors. Volumes in the quarter were flat compared to the prior year as higher volumes to the manufacturing, metals and energy end-markets were offset by weaker volumes to the chemicals and electronics end-markets. Negative currency, primarily the Mexican Peso and Canadian Dollar against the U.S. Dollar, and cost pass-through, primarily lower natural gas prices passed through to hydrogen customers, reduced sales by 6%. For the nine month period, sales increased $275 million, or 7%, excluding currency and cost pass-through. Volumes, pricing and acquisitions increased sales by 4%, 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 $34 million, or 10%, for the third quarter and increased $120 million, or 12%, for the nine months ended September 30, 2012 versus the respective 2011 periods. Higher pricing, productivity savings and a gain on asset sale drove the increase and more than offset inflationary cost increases and the negative impact of currency translation. Higher volumes also contributed to the increase in the year-to-date period. The operating margin rose to 26.9% for the quarter and 26.3% for the year-to-date period.

 

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Europe

 

     Quarter Ended September 30,     Nine Months Ended September 30,  
     2012     2011     Variance %     2012     2011     Variance %  

Sales

   $ 352      $ 361        (2 )%    $ 1,111      $ 1,076        3

Cost of sales, exclusive of depreciation and amortization

     204        213          634        625     
  

 

 

   

 

 

     

 

 

   

 

 

   

Gross margin

     148        148          477        451     

Operating expenses

     52        44          170        140     

Depreciation and amortization

     36        36          111        103     
  

 

 

   

 

 

     

 

 

   

 

 

   

Operating profit

   $ 60      $ 68        (12 )%    $ 196      $ 208        (6 )% 
  

 

 

   

 

 

     

 

 

   

 

 

   

Margin %

     17.0     18.8       17.6     19.3  

 

     Quarter ended September 30,
2012 vs. 2011
    Nine Months Ended September 30,
2012 v