Form 10-Q PRAXAIR INC For: Sep 30
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E-mailUNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
� | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September�30, 2014
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
(Registrants 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�������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�������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 | � | � | 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���
At September�30, 2014, 291,372,541 shares of common stock ($0.01 par value) of the Registrant were outstanding.
INDEX | ||
PART I - FINANCIAL INFORMATION | � | |
Item�1. | ||
Item�2. | ||
Item�3. | ||
Item�4. | ||
Item�1. | ||
Item�1A. | ||
Item�2. | ||
Item�3. | ||
Item�4. | ||
Item�5. | ||
Item�6. | ||
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
�
� | Quarter�Ended�September 30, | ||||||
� | 2014 | 2013 | |||||
SALES | $ | 3,144 | $ | 3,013 | |||
Cost of sales, exclusive of depreciation and amortization | 1,780 | 1,697 | |||||
Selling, general and administrative | 327 | 336 | |||||
Depreciation and amortization | 301 | 281 | |||||
Research and development | 25 | 24 | |||||
Venezuela currency devaluation and other charges | 9 | ||||||
Other income (expense) - net | 4 | ||||||
OPERATING PROFIT | 711 | 670 | |||||
Interest expense - net | 45 | 41 | |||||
INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS | 666 | 629 | |||||
Income taxes | 187 | 175 | |||||
INCOME BEFORE EQUITY INVESTMENTS | 479 | 454 | |||||
Income from equity investments | 11 | 8 | |||||
NET INCOME (INCLUDING NONCONTROLLING INTERESTS) | 490 | 462 | |||||
Less: noncontrolling interests | (13 | ) | (17 | ) | |||
NET INCOME - PRAXAIR, INC. | $ | 477 | $ | 445 | |||
PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS | |||||||
Basic earnings per share | $ | 1.63 | $ | 1.51 | |||
Diluted earnings per share | $ | 1.62 | $ | 1.49 | |||
Cash dividends per share | $ | 0.65 | $ | 0.60 | |||
WEIGHTED AVERAGE SHARES OUTSTANDING (000s): | |||||||
Basic shares outstanding | 292,170 | 295,124 | |||||
Diluted shares outstanding | 295,239 | 298,357 | |||||
The accompanying notes are an integral part of these financial statements.
3
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
�
� | Nine Months Ended September 30, | ||||||
� | 2014 | 2013 | |||||
SALES | $ | 9,283 | $ | 8,915 | |||
Cost of sales, exclusive of depreciation and amortization | 5,273 | 5,045 | |||||
Selling, general and administrative | 988 | 1,017 | |||||
Depreciation and amortization | 879 | 822 | |||||
Research and development | 72 | 72 | |||||
Venezuela currency devaluation and other charges | 32 | ||||||
Other income (expense) - net | 12 | 8 | |||||
OPERATING PROFIT | 2,083 | 1,935 | |||||
Interest expense - net | 134 | 122 | |||||
INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS | 1,949 | 1,813 | |||||
Income taxes | 546 | 513 | |||||
INCOME BEFORE EQUITY INVESTMENTS | 1,403 | 1,300 | |||||
Income from equity investments | 30 | 29 | |||||
NET INCOME (INCLUDING NONCONTROLLING INTERESTS) | 1,433 | 1,329 | |||||
Less: noncontrolling interests | (41 | ) | (48 | ) | |||
NET INCOME - PRAXAIR, INC. | $ | 1,392 | $ | 1,281 | |||
PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS | |||||||
Basic earnings per share | $ | 4.75 | $ | 4.33 | |||
Diluted earnings per share | $ | 4.70 | $ | 4.28 | |||
Cash dividends per share | $ | 1.95 | $ | 1.80 | |||
WEIGHTED AVERAGE SHARES OUTSTANDING (000s): | |||||||
Basic shares outstanding | 293,103 | 295,799 | |||||
Diluted shares outstanding | 296,240 | 299,077 | |||||
The accompanying notes are an integral part of these financial statements.
4
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
�
� | Quarter�Ended�September 30, | ||||||
� | 2014 | 2013 | |||||
NET INCOME (INCLUDING NONCONTROLLING INTERESTS) | $ | 490 | $ | 462 | |||
OTHER COMPREHENSIVE INCOME (LOSS) | |||||||
Translation adjustments: | |||||||
Foreign currency translation adjustments | (604 | ) | 77 | ||||
Income taxes | (5 | ) | |||||
Translation adjustments | (609 | ) | 77 | ||||
Funded status - retirement obligations (Note 11): | |||||||
Retirement program remeasurements | 18 | 5 | |||||
Reclassifications to net income | 12 | 31 | |||||
Income taxes | (9 | ) | (13 | ) | |||
Funded status - retirement obligations | 21 | 23 | |||||
Derivative instruments (Note 6): | |||||||
Current quarter unrealized gain (loss) | 1 | ||||||
Derivative instruments | 1 | ||||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | (588 | ) | 101 | ||||
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS) | (98 | ) | 563 | ||||
Less: noncontrolling interests | 7 | (23 | ) | ||||
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC. | $ | (91 | ) | $ | 540 | ||
The accompanying notes are an integral part of these financial statements.
5
PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
�
� | Nine Months Ended September 30, | ||||||
� | 2014 | 2013 | |||||
NET INCOME (INCLUDING NONCONTROLLING INTERESTS) | $ | 1,433 | $ | 1,329 | |||
OTHER COMPREHENSIVE INCOME (LOSS) | |||||||
Translation adjustments: | |||||||
�Foreign currency translation adjustments | (460 | ) | (354 | ) | |||
�Reclassifications to net income | (3 | ) | |||||
�Income taxes | (20 | ) | 19 | ||||
Translation adjustments | (483 | ) | (335 | ) | |||
Funded status - retirement obligations (Note 11): | |||||||
Retirement program remeasurements | 2 | (4 | ) | ||||
Reclassifications to net income | 39 | 76 | |||||
Income taxes | (13 | ) | (23 | ) | |||
Funded status - retirement obligations | 28 | 49 | |||||
Derivative instruments (Note 6): | |||||||
Current period unrealized gain | 3 | 1 | |||||
Income taxes | (1 | ) | |||||
Derivative instruments | 2 | 1 | |||||
TOTAL OTHER COMPREHENSIVE INCOME (LOSS) | (453 | ) | (285 | ) | |||
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS) | 980 | 1,044 | |||||
Less: noncontrolling interests | (18 | ) | (40 | ) | |||
COMPREHENSIVE INCOME - PRAXAIR, INC. | $ | 962 | $ | 1,004 | |||
The accompanying notes are an integral part of these financial statements.
6
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
�
September 30, 2014 | December 31, 2013 | ||||||
ASSETS | |||||||
Cash and cash equivalents | $ | 168 | $ | 138 | |||
Accounts receivable - net | 1,959 | 1,892 | |||||
Inventories | 545 | 506 | |||||
Prepaid and other current assets | 386 | 380 | |||||
TOTAL CURRENT ASSETS | 3,058 | 2,916 | |||||
Property, plant and equipment (less accumulated depreciation of $12,049 in 2014 and $11,753 in 2013) | 12,268 | 12,278 | |||||
Goodwill | 3,189 | 3,194 | |||||
Other intangible assets - net | 610 | 596 | |||||
Other long-term assets | 1,259 | 1,271 | |||||
TOTAL ASSETS | $ | 20,384 | $ | 20,255 | |||
LIABILITIES AND EQUITY | |||||||
Accounts payable | $ | 864 | $ | 921 | |||
Short-term debt | 619 | 782 | |||||
Current portion of long-term debt | 413 | 3 | |||||
Other current liabilities | 1,064 | 958 | |||||
TOTAL CURRENT LIABILITIES | 2,960 | 2,664 | |||||
Long-term debt | 8,089 | 8,026 | |||||
Other long-term liabilities | 2,205 | 2,255 | |||||
TOTAL LIABILITIES | 13,254 | 12,945 | |||||
Commitments and contingencies (Note 12) | |||||||
Redeemable noncontrolling interests | 190 | 307 | |||||
Praxair, Inc. Shareholders Equity: | |||||||
Common stock $0.01 par value, authorized - 800,000,000 shares, issued - 383,230,625 shares for both periods | 4 | 4 | |||||
Additional paid-in capital | 3,981 | 3,970 | |||||
Retained earnings | 11,348 | 10,528 | |||||
Accumulated other comprehensive income (loss) | (2,411 | ) | (1,981 | ) | |||
Treasury stock, at cost (2014 - 91,858,084 shares and 2013 - 89,096,761 shares) | (6,370 | ) | (5,912 | ) | |||
Total Praxair, Inc. Shareholders Equity | 6,552 | 6,609 | |||||
Noncontrolling interests | 388 | 394 | |||||
TOTAL EQUITY | 6,940 | 7,003 | |||||
TOTAL LIABILITIES AND EQUITY | $ | 20,384 | $ | 20,255 | |||
The accompanying notes are an integral part of these financial statements.
7
PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
�
� | Nine Months Ended September 30, | ||||||
� | 2014 | 2013 | |||||
OPERATIONS | |||||||
Net income - Praxair, Inc. | $ | 1,392 | $ | 1,281 | |||
Noncontrolling interests | 41 | 48 | |||||
Net income (including noncontrolling interests) | 1,433 | 1,329 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Venezuela currency devaluation | 23 | ||||||
Depreciation and amortization | 879 | 822 | |||||
Deferred income taxes | (32 | ) | 88 | ||||
Share-based compensation | 42 | 52 | |||||
Working capital: | |||||||
Accounts receivable | (144 | ) | (139 | ) | |||
Inventory | (52 | ) | (63 | ) | |||
Prepaid and other current assets | 18 | (54 | ) | ||||
Payables and accruals | (3 | ) | 18 | ||||
Pension contributions | (14 | ) | (48 | ) | |||
Long-term assets, liabilities and other | (31 | ) | (75 | ) | |||
Net cash provided by operating activities | 2,096 | 1,953 | |||||
INVESTING | |||||||
Capital expenditures | (1,207 | ) | (1,504 | ) | |||
Acquisitions, net of cash acquired | (191 | ) | (1,311 | ) | |||
Divestitures and asset sales | 86 | 65 | |||||
Net cash used for investing activities | (1,312 | ) | (2,750 | ) | |||
FINANCING | |||||||
Short-term debt borrowings (repayments) - net | (161 | ) | 504 | ||||
Long-term debt borrowings | 867 | 2,105 | |||||
Long-term debt repayments | (312 | ) | (939 | ) | |||
Issuances of common stock | 85 | 108 | |||||
Purchases of common stock | (562 | ) | (458 | ) | |||
Cash dividends - Praxair, Inc. shareholders | (570 | ) | (531 | ) | |||
Excess tax benefit on share-based compensation | 28 | 31 | |||||
Noncontrolling interest transactions and other | (123 | ) | (24 | ) | |||
Net cash (used for) provided by financing activities | (748 | ) | 796 | ||||
Effect of exchange rate changes on cash and cash equivalents | (6 | ) | (22 | ) | |||
Change in cash and cash equivalents | 30 | (23 | ) | ||||
Cash and cash equivalents, beginning-of-period | 138 | 157 | |||||
Cash and cash equivalents, end-of-period | $ | 168 | $ | 134 | |||
The accompanying notes are an integral part of these financial statements.
8
INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited)
�
9
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 Praxairs 2013 Annual Report on Form 10-K. There have been no material changes to the companys significant accounting policies during 2014.
Inventories - Effective July 1, 2014, the Company changed its method of accounting for all remaining operations that were using the last-in, first-out ( LIFO ) method to the average-cost method. This change only impacted approximately 6% of Praxair's inventories which were accounted for under the LIFO method. See Note 4.
Accounting Standards Implemented in 2014
The following standards were effective for Praxair in 2014 and their adoption did not have a significant impact on the condensed consolidated financial statements:
" | Accounting for Cumulative Translation Adjustment In March 2013, the Financial Accounting Standards Board ("FASB") issued updated guidance on the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or as a result of acquisitions achieved in stages. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements. |
" | Presentation of Unrecognized Tax Benefits In July 2013, the FASB issued updated guidance on the presentation of unrecognized tax benefits. The new guidance requires an entity to present certain unrecognized tax benefits, or a portion thereof, as a reduction to the related deferred tax asset, primarily for loss and tax credit carryforwards. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements. |
Accounting Standards to be Implemented
" | Reporting Discontinued Operations In April 2014, the FASB issued updated guidance on the reporting and disclosures of discontinued operations. The new guidance requires that the disposal of a component of an entity be reported as discontinued operations only if the action represents a strategic shift that will have a major effect on an entitys operations and financial results, and would require expanded disclosures. This guidance will be effective for Praxair beginning in the first quarter of 2015, with early adoption optional. |
" | Revenue Recognition In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue. The new guidance requires the evaluation of contracts with customers to determine the recognition of revenue when or as the entity satisfies a performance obligation, and would require expanded disclosures. This guidance will be effective for Praxair beginning in the first quarter 2017 and includes several transition options. Praxair is in the early stages of reviewing the new guidance and will provide updates on the expected impact to Praxair in future filings, as determined. |
" | Accounting for Share-based Compensation - In June 2014, the FASB issued updated guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Praxair does not expect this requirement to have a significant impact on the consolidated financial statements. This guidance will be effective for Praxair beginning in the first quarter 2016, with early adoption optional. |
Reclassifications Certain prior years amounts have been reclassified to conform to the current years presentation.
2. 2013 Venezuela Currency Devaluation and Other Charges
Venezuela Currency Devaluation
On February 8, 2013, Venezuela announced a devaluation of the Venezuelan Bolivar from 4.30 to 6.30 (a 32% devaluation), effective on February 13, 2013. In the first quarter 2013 Praxair recorded a $23 million pre-tax charge ($23 million after-tax
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or $0.08 per diluted share) due primarily to the remeasurement of the local Venezuelan balance sheet to reflect the new official 6.30 exchange rate.
Pension Settlement Charge
In 2012 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 the third quarter 2013, when the cash payments were made to the retirees.
3. Acquisitions
2014 Acquisitions
During the nine months ended September 30, 2014 Praxair had acquisitions totaling $191 million. These consisted primarily of an industrial gases business in Italy and packaged gases businesses in North and South America. These transactions resulted in goodwill and other intangible assets of $71 million and $53 million, respectively (see Note 9). The allocation of the purchase price is based on preliminary estimates and assumptions, and are subject to revision based on final information received, including appraisals and other analyses that support the underlying estimates. Adjustments, if any, are not expected to be material.
2013 Acquisitions
NuCO2�
On March 1, 2013 Praxair acquired 100% of NuCO2 Inc. ("NuCO2") for $1,095 million. NuCO2 is the leading national provider of beverage carbonation solutions in the United States to the restaurant and hospitality industries with 162,000 customer locations and 900 employees, and with 2012 sales of approximately $230 million. The NuCO2 micro-bulk beverage carbonation solution is the service model of choice for quick service restaurants and convenience stores offering fountain beverages and represents an extension of Praxair's core industrial gas business.
The acquisition of NuCO2 was accounted for as a business combination. Following the acquisition date, 100% of NuCO2's results were consolidated in the North America business segment. For the quarters ended March 31, 2014 and 2013, Praxair's consolidated income statement includes sales of $63 million and $20 million, respectively, related to NuCO2. Pro forma results for 2013 have not been included as the impact of the acquisition is not material to the consolidated statements of income.
The following table summarizes the fair value of identifiable assets acquired and liabilities assumed in the acquisition of NuCO2 as of the acquisition date. Purchase accounting has been finalized and adjustments made subsequent to the acquisition date were not significant.
(Millions of dollars) | March 1, 2013 | |||
Trade receivables, net | $ | 17 | ||
Property, plant and equipment | � | 199 | ||
Intangible assets | � | 374 | ||
Deferred income taxes | � | (85 | ) | |
Other assets and (liabilities) | � | (28 | ) | |
Goodwill | � | 618 | ||
Purchase price | � | $ | 1,095 | |
�
The identifiable intangible assets primarily consist of customer relationships that will be amortized over their estimated useful life of 25 years. The deferred income taxes relate primarily to property, plant and equipment, intangibles and operating loss carryforwards. The goodwill resulting from the acquisition is attributable to (i) expected growth from market penetration into the quick service restaurants, convenience stores and themed restaurant chains in the United States and select international markets as we leverage Praxair's customer and distribution networks worldwide, and (ii) cost synergies related to the procurement of raw materials, distribution-related expenses and administrative costs as we integrate and rationalize administration tasks and leverage Praxair's purchasing scale. The goodwill is not deductible for income tax purposes.
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Other Acquisitions
On May 29, 2013 Praxair acquired Dominion Technology Gases ( Dominion ), a leading global supplier of diving, welding, industrial, laboratory and calibration gases and associated equipment to the offshore oil and gas industry based in Aberdeen, Scotland. Dominion provides products and services to the expanding global offshore oil and gas market.
On June 3, 2013 Praxair acquired Volgograd Oxygen Factory ( VOF ), the largest independent industrial gas business in southern Russia, expanding Praxair's production and distribution capabilities in the Volgograd region. Additionally, Praxair acquired several smaller independent package gas distributors in the United States and a customer contract with operating assets in China.
The results of operations of these acquisitions were consolidated from the respective acquisition dates, primarily in the Europe business segment and the impact was not significant. The aggregate purchase price for these acquisitions was $216 million and resulted in the recognition of $186 million of intangible assets, including $99 million of goodwill and $87 million relating to other intangible assets, which will be amortized over their estimated useful life.
4. Supplemental Information
Inventories
The following is a summary of Praxairs consolidated inventories:
(Millions of dollars) | September�30, 2014 | December�31, 2013 | |||||
Inventories * | |||||||
Raw materials and supplies | $ | 176 | $ | 167 | |||
Work in process | 61 | 58 | |||||
Finished goods | 308 | 281 | |||||
Total inventories | $ | 545 | $ | 506 | |||
* Effective July 1, 2014, Praxair changed its method of accounting for all remaining operations that were using the last-in, first-out ( LIFO ) method to the average-cost method, primarily raw materials. This change only impacted approximately 6% of consolidated inventories which were accounted for under the LIFO method. Praxair applied this change as a cumulative effect adjustment in the third quarter 2014 and did not restate prior periods because the impact was not material. The accounting change increased inventories by $9 million at September 30, 2014, and decreased cost of sales, exclusive of depreciation and amortization $9 million ($6 million after-tax) for both the quarter and nine-month periods ended September 30, 2014. The Company believes the change is preferable because it will better reflect the impact of current costs in both the consolidated balance sheets and consolidated statements of income, is comparable accounting to the peer group and is aligned with Praxair's inventory management.
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 $36 million at September�30, 2014 and December�31, 2013, respectively. These amounts are net of reserves of $52 million and $51 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 account balance changes during 2014 were primarily the result of additional receivables, net of reserves.
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5. Debt
The following is a summary of Praxairs outstanding debt at September�30, 2014 and December�31, 2013:
(Millions of dollars) | September�30, 2014 | December�31, 2013 | |||||
SHORT-TERM | |||||||
Commercial paper and U.S. bank borrowings | $ | 565 | $ | 712 | |||
Other bank borrowings (primarily international) | 54 | 70 | |||||
Total short-term debt | 619 | 782 | |||||
LONG-TERM | |||||||
U.S. borrowings (U.S. dollar denominated unless otherwise noted) | |||||||
4.375% Notes due 2014 (a) | 300 | ||||||
4.625% Notes due 2015 (b) | 500 | 500 | |||||
3.25% Notes due 2015 (c, d) | 411 | 418 | |||||
0.75% Notes due 2016 | 400 | 400 | |||||
5.375% Notes due 2016 | 400 | 400 | |||||
5.20% Notes due 2017 | 325 | 325 | |||||
1.05% Notes due 2017 | 400 | 400 | |||||
1.20% Notes due 2018 | 500 | 500 | |||||
1.25% Notes due 2018 (c, d) | 478 | 478 | |||||
4.50% Notes due 2019 (c) | 598 | 598 | |||||
1.90% Notes due 2019 | 500 | 500 | |||||
1.50% Euro-denominated notes due 2020 (c, e) | 754 | ||||||
4.05% Notes due 2021 (c) | 498 | 498 | |||||
3.00% Notes due 2021 (c) | 497 | 497 | |||||
2.45% Notes due 2022 (c) | 598 | 598 | |||||
2.20% Notes due 2022 (c) | 499 | 499 | |||||
2.70% Notes due 2023 (c) | 499 | 498 | |||||
3.55% Notes due 2042 (c) | 466 | 466 | |||||
Other | 5 | 5 | |||||
International bank borrowings (b) | 166 | 140 | |||||
Obligations under capital leases | 8 | 9 | |||||
8,502 | 8,029 | ||||||
Less: current portion of long-term debt | (413 | ) | (3 | ) | |||
Total long-term debt | 8,089 | 8,026 | |||||
Total debt | $ | 9,121 | $ | 8,811 | |||
�
(a) | In March 2014, Praxair repaid $300 million of 4.375% notes that became due. |
(b) | Classified as long-term because of the companys intent to refinance this debt on a long-term basis and the availability of such financing under the terms of an existing $2 billion long-term credit facility. |
(c) | Amounts are net of unamortized discounts. |
(d) | September�30, 2014 and December�31, 2013 include a $14 million and $22 million fair value increase, respectively, related to hedge accounting. See Note 6 for additional information. |
(e) | During March 2014, Praxair issued �600 million 1.50% Euro-denominated notes due 2020. This debt issuance has been designated as a hedge of the net investment position in European operations where the Euro is the functional currency (see Note 6). The proceeds of this debt issuance were used for general corporate purposes, including acquisitions, repayment of debt and share repurchases under the company's share repurchase program. |
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6. 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 companys 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 three types of derivatives that the company enters into: (i)�those relating to fair-value exposures, (ii)�those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment 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 Praxairs 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, 2014 and December�31, 2013 for consolidated subsidiaries:
� | � | � | Fair Value | ||||||||||||||||||||
� | Notional Amounts | Assets | Liabilities | ||||||||||||||||||||
(Millions of dollars) | September�30, 2014 | December�31, 2013 | September�30, 2014 | December�31, 2013 | September�30, 2014 | December�31, 2013 | |||||||||||||||||
Derivatives Not Designated as Hedging Instruments: | |||||||||||||||||||||||
Currency contracts: | |||||||||||||||||||||||
Balance sheet items (a) | $ | 2,269 | $ | 2,197 | $ | 4 | $ | 4 | $ | 34 | $ | 14 | |||||||||||
Derivatives Designated as Hedging Instruments: | |||||||||||||||||||||||
Currency contracts: | |||||||||||||||||||||||
Forecasted purchases (a) | $ | $ | 5 | $ | $ | $ | $ | ||||||||||||||||
Interest rate contracts: | |||||||||||||||||||||||
Interest rate swaps (b) | 875 | 875 | 14 | 22 | |||||||||||||||||||
Total | $ | 875 | $ | 880 | $ | 14 | $ | 22 | $ | $ | |||||||||||||
Total Derivatives | $ | 3,144 | $ | 3,077 | $ | 18 | $ | 26 | $ | 34 | $ | 14 | |||||||||||
�
(a) | Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities. |
(b) | Assets are recorded in other current and other long term assets |
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.
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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.
Net Investment Hedge
Praxair has designated the �600 million ($754 million as of September�30, 2014) 1.50% Euro-denominated notes due 2020, as a hedge of the net investment position in its European operations. This Euro-denominated debt instrument reduces the company's exposure to changes in the currency exchange rate on investments in foreign subsidiaries with Euro functional currencies. Since the time the Euro-denominated notes were issued in March 2014 through September 30, 2014, exchange rate movements have reduced long-term debt by $74 million, with the offsetting gain shown within the cumulative translation component of AOCI in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income.
Interest Rate Contracts
Outstanding Interest Rate Swaps
At September�30, 2014, Praxair had $875 million notional amount of interest-rate swap agreements outstanding related to the $400 million 3.25% fixed-rate notes that mature in 2015 and to the $475 million 1.25% notes that mature 2018, which effectively convert fixed-rate interest to variable-rate interest. These swap agreements were designated as fair value hedges 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, 2014, $14 million was recognized as an increase in the fair value of these notes ($22 million at December�31, 2013).
Terminated Interest Rate Swap
During 2010, Praxair entered into a $500 million notional amount of interest-rate swap agreement that effectively converted fixed-rate interest to variable-rate interest on the $500 million 2.125% notes that matured in June 2013. This swap agreement was terminated in 2011, and Praxair received a $18 million cash payment. This $18 million gain was recognized in earnings as a reduction to interest expense over the remaining term of the underlying debt. Accordingly, during the nine months ended September 30, 2013, $4 million was recognized as a reduction to interest expense. No other periods presented herein were impacted.
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, 2014 | December�31, 2013 | |||||||||||
Treasury Rate Locks | |||||||||||||
Underlying debt instrument: | |||||||||||||
$500 million 2.20% fixed-rate notes that mature in 2022 (b) | 2012 | $ | (2 | ) | $ | (1 | ) | $ | (2 | ) | |||
$500 million 3.00% fixed-rate notes that mature in 2021 (b) | 2011 | (11 | ) | (8 | ) | (9 | ) | ||||||
$600 million 4.50% fixed-rate notes that mature in 2019 (b) | 2009 | 16 | 8 | 10 | |||||||||
$500 million 4.625% fixed-rate notes that mature in 2015 (b) | 2008 | (7 | ) | (1 | ) | ||||||||
Total - pre-tax | $ | (1 | ) | $ | (2 | ) | |||||||
Less: income taxes | 1 | ||||||||||||
After- tax amounts | $ | (1 | ) | $ | (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. Refer to the table below summarizing the impact on the companys 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. |
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The following tables summarize the impacts of the companys derivatives on the consolidated statements of income and AOCI:
� | Amount�of�Pre-Tax�Gain�(Loss) Recognized in Earnings * | ||||||||||||||
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||
(Millions of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
Derivatives Not Designated as Hedging Instruments | |||||||||||||||
Currency contracts: | |||||||||||||||
Balance sheet items | |||||||||||||||
Debt-related | $ | (45 | ) | $ | (4 | ) | $ | (16 | ) | $ | (10 | ) | |||
Other balance sheet items | (5 | ) | 1 | (1 | ) | (9 | ) | ||||||||
Total | $ | (50 | ) | $ | (3 | ) | $ | (17 | ) | $ | (19 | ) | |||
* The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. Accordingly, 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.
Derivatives�Designated as�Hedging�Instruments **
� | Quarter Ended | ||||||||||||||
� | Amount�of�Gain� (Loss) Recognized�in�AOCI | Amount�of�Gain� (Loss) Reclassified�from�AOCI�to the Consolidated Statement of Income | |||||||||||||
(Millions of dollars) | September�30, 2014 | September�30, 2013 | September�30, 2014 | September�30, 2013 | |||||||||||
Currency contracts: | |||||||||||||||
Forecasted�purchases | $ | $ | 1 | $ | $ | ||||||||||
� | Nine Months Ended | ||||||||||||||
Amount�of�Gain� (Loss) Recognized�in�AOCI | Amount�of�Gain� (Loss) Reclassified�from�AOCI�to the Consolidated Statement of Income | ||||||||||||||
(Millions of dollars) | September�30, 2014 | September�30, 2013 | September�30, 2014 | September�30, 2013 | |||||||||||
Currency contracts: | |||||||||||||||
Net investment hedge | $ | (6 | ) | $ | $ | $ | |||||||||
Forecasted�purchases | $ | $ | 1 | $ | $ | ||||||||||
Total - pre tax | $ | (6 | ) | $ | 1 | $ | $ | ||||||||
Less: income taxes | 2 | ||||||||||||||
Total - Net of Taxes | $ | (4 | ) | $ | 1 | $ | $ | ||||||||
**The gains (losses) on net investment hedges are recorded as a component of AOCI within foreign currency translation adjustments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on forecasted purchases and treasury rate locks are recorded as a component of AOCI within derivative instruments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. There was no ineffectiveness for these instruments during 2014 or 2013. The gains (losses) on net investment hedges are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. 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 losses of less than $1 million are expected to be reclassified to earnings during the next twelve months.
7. 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)
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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, 2014 | December�31, 2013 | September�30, 2014 | December�31, 2013 | September�30, 2014 | December�31, 2013 | |||||||||||||
Assets | |||||||||||||||||||
Derivatives | $ | 18 | $ | 26 | |||||||||||||||
Liabilities | |||||||||||||||||||
Derivatives | $ | 34 | $ | 14 | |||||||||||||||
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. Investments are marketable securities traded on an exchange.
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, 2014, the estimated fair value of Praxairs long-term debt portfolio was $8,603 million versus a carrying value of $8,502 million. At December�31, 2013, the estimated fair value of Praxairs long-term debt portfolio was $7,976 million versus a carrying value of $8,029 million. Differences from carrying amounts are attributable to interest-rate changes subsequent to when the debt was issued.
8. 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, | |||||||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||||||
Numerator (Millions of dollars) | |||||||||||||||
Net income - Praxair, Inc. | $ | 477 | $ | 445 | $ | 1,392 | $ | 1,281 | |||||||
Denominator (Thousands of shares) | |||||||||||||||
Weighted average shares outstanding | 291,664 | 294,595 | 292,597 | 295,271 | |||||||||||
Shares earned and issuable under compensation plans | 506 | 529 | 506 | 528 | |||||||||||
Weighted average shares used in basic earnings per share | 292,170 | 295,124 | 293,103 | 295,799 | |||||||||||
Effect of dilutive securities | |||||||||||||||
Stock options and awards | 3,069 | 3,233 | 3,137 | 3,278 | |||||||||||
Weighted average shares used in diluted earnings per share | 295,239 | 298,357 | 296,240 | 299,077 | |||||||||||
Basic Earnings Per Share | $ | 1.63 | $ | 1.51 | $ | 4.75 | $ | 4.33 | |||||||
Diluted Earnings Per Share | $ | 1.62 | $ | 1.49 | $ | 4.70 | $ | 4.28 | |||||||
There were no antidilutive stock options for the quarter�and nine months ended September 30, 2014. There were no antidilutive shares for the quarter ended September 30, 2013. Stock options of 780 were antidilutive and therefore excluded in the computation of diluted earnings per share for nine months ended September 30, 2013.
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9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:
(Millions of dollars) | North America | South America | Europe | Asia | Surface Technologies | Total | |||||||||||||||||
Balance, December 31, 2013 | $ | 2,117 | $ | 166 | $ | 743 | $ | 24 | $ | 144 | $ | 3,194 | |||||||||||
Acquisitions (Note 3) | 46 | 4 | 17 | 4 | 71 | ||||||||||||||||||
Purchase adjustments�& other | (6 | ) | 5 | (1 | ) | ||||||||||||||||||
Foreign currency translation | (11 | ) | (9 | ) | (50 | ) | (5 | ) | (75 | ) | |||||||||||||
Balance, September 30, 2014 | $ | 2,152 | $ | 161 | $ | 704 | $ | 24 | $ | 148 | $ | 3,189 | |||||||||||
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 2014 test completed last quarter, Praxair applied the FASB's updated accounting guidance (refer to Note 1 to the consolidated financial statements of Praxair's 2013 Annual Report on Form 10-K) 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, 2014.
Changes in the carrying amounts of other intangibles for the nine months ended September 30, 2014 were as follows:
(Millions of dollars) | Customer�& License/Use Agreements | Non-compete Agreements | Patents�& Other | Total | |||||||||||
Cost: | |||||||||||||||
Balance, December 31, 2013 | $ | 661 | $ | 31 | $ | 43 | $ | 735 | |||||||
Additions (Note 3) | 42 | 11 | 53 | ||||||||||||
Foreign currency translation | (10 | ) | (10 | ) | |||||||||||
Other * | (5 | ) | 4 | (1 | ) | ||||||||||
Balance, September 30, 2014 | $ | 693 | $ | 37 | $ | 47 | $ | 777 | |||||||
Less: Accumulated amortization | |||||||||||||||
Balance, December 31, 2013 | $ | (118 | ) | $ | (16 | ) | $ | (5 | ) | $ | (139 | ) | |||
Amortization expense | (27 | ) | (5 | ) | (3 | ) | (35 | ) | |||||||
Foreign currency translation | 3 | 3 | |||||||||||||
Other * | 4 | 4 | |||||||||||||
Balance, September 30, 2014 | $ | (142 | ) | $ | (17 | ) | $ | (8 | ) | $ | (167 | ) | |||
Net balance at September 30, 2014 | $ | 551 | $ | 20 | $ | 39 | $ | 610 | |||||||
* Other primarily relates to the write-off of fully amortized assets and purchase accounting adjustments.
There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible assets is approximately 18 years.
Total estimated annual amortization expense is as follows:
(Millions of dollars) | � | ||
Remaining 2014 | $ | 16 | |
2015 | 48 | ||
2016 | 47 | ||
2017 | 39 | ||
2018 | 35 | ||
Thereafter | 425 | ||
$ | 610 | ||
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10. Share-Based Compensation
Share-based compensation of $14 million ($10 million after-tax) and $18 million ($12 million after-tax) was recognized during the quarters�ended�September�30, 2014 and 2013, respectively. Share-based compensation of $42 million ($29 million after-tax) and $52 million ($35 million after-tax) was recognized for the nine months ended September 30, 2014 and 2013, 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 Praxairs share-based compensation arrangements and prior-year grants, refer to Note 15 to the consolidated financial statements of Praxairs 2013 Annual Report on Form 10-K.
Stock Options
The weighted-average fair value of options granted during the nine months ended September 30, 2014 was $14.62 ($16.31 in 2013) based on the Black-Scholes Options-Pricing model. The decrease in grant date fair value year-over-year is primarily attributable to the decrease in volatility which was partially offset by increases in Praxair's stock price and risk-free interest rate.
The following weighted-average assumptions were used to value the grants in 2014 and 2013 :
� | Nine Months Ended September 30, | ||||
� | 2014 | 2013 | |||
Dividend yield | 2.0 | % | 2.2 | % | |
Volatility | 15.2 | % | 21.7 | % | |
Risk-free interest rate | 1.57 | % | 0.76 | % | |
Expected term years | 5 | 5 | |||
The following table summarizes option activity under the plans as of September�30, 2014 and changes during the nine-month period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):
Number�of Options� (000s) | Average Exercise�Price | Average Remaining Life | Aggregate Intrinsic Value | |||||||||
Outstanding at January�1, 2014 | 11,161 | $ | 81.42 | |||||||||
Granted | 1,293 | 128.80 | ||||||||||
Exercised | (1,150 | ) | 63.14 | |||||||||
Cancelled or Expired | (83 | ) | 109.81 | |||||||||
Outstanding at September 30, 2014 | 11,221 | 88.54 | 5.5 | $ | 454 | |||||||
Exercisable at September 30, 2014 | 8,630 | $ | 79.33 | 4.5 | $ | 429 | ||||||
The aggregate intrinsic value represents the difference between the companys closing stock price of $129.00 as of September�30, 2014 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, 2014 was $14 million and $78 million, respectively ($25 million and $93 million during the same time periods in 2013, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and nine months ended September�30, 2014 was $12 million and $73 million ($29 million and $96 million for the same time period in 2013). The cash tax benefit realized from share-based compensation totaled $5 million and $44 million for the quarter and nine months ended September�30, 2014, of which $28 million in excess tax benefits was classified as financing cash flows for the nine months ended September�30, 2014 ($9 million and $44 million cash tax benefit for the same periods in 2013 of which $31 million represented excess tax benefit for the nine months ended September�30, 2013).
As of September�30, 2014, $23 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1.0 year .
Performance-Based and Restricted Stock Awards
During the nine months ended September�30, 2014, the company granted performance-based stock units to employees which vest principally based 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 200 percent of the target number of shares granted based upon the companys 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 companys common stock on
19
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.
During the nine months ended September�30, 2014, the company also granted restricted stock units to employees. The majority of the restricted stock units vest at the end of 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, 2014 was $121.16 and $122.73, respectively, ($103.46 and $105.53 for the same period in 2013). This is based on the closing market price of Praxairs 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, 2014 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 (000s) | Average Grant� Date Fair Value | Number� of Shares (000s) | Average Grant� Date Fair Value | |||||||||
Non-vested at January�1, 2014 | 867 | $ | 99.55 | 337 | $ | 100.41 | |||||||
Granted* | 328 | 121.16 | 90 | 122.73 | |||||||||
Vested* | (338 | ) | 92.06 | (107 | ) | 95.80 | |||||||
Cancelled | (21 | ) | 110.21 | (14 | ) | 103.64 | |||||||
Non-vested at September 30, 2014 | 836 | $ | 109.10 | 306 | $ | 108.41 | |||||||
* Amounts for performance-based awards include 49 thousand�shares which represent actual shares vested in 2014 in excess of original targeted amounts for 2011 grants.
As of September�30, 2014, based on current estimates of future performance, $45 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2017 and $17 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2017.
11. Retirement Programs
The components of net pension and postretirement benefits other than pensions ( OPEB ) costs for the quarter and nine months ended September 30, 2014 and 2013 are shown below:
�
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||||||||||||
� | Pensions | OPEB | Pensions | OPEB | |||||||||||||||||||||||||||
(Millions of dollars) | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | 2014 | 2013 | |||||||||||||||||||||||
Service cost | $ | 13 | $ | 14 | $ | 1 | $ | 1 | $ | 39 | $ | 42 | $ | 3 | $ | 3 | |||||||||||||||
Interest cost | 31 | 28 | 3 | 3 | 93 | 86 | 9 | 9 | |||||||||||||||||||||||
Expected return on plan assets | (40 | ) | (38 | ) | (120 | ) | (114 | ) | |||||||||||||||||||||||
Net amortization and deferral | 15 | 23 | (3 | ) | (1 | ) | 46 | 70 | (7 | ) | (3 | ) | |||||||||||||||||||
Net periodic benefit cost before pension settlement charge | 19 | 27 | 1 | 3 | 58 | 84 | 5 | 9 | |||||||||||||||||||||||
Pension settlement charge (Note 2) | 9 | 9 | |||||||||||||||||||||||||||||
Net periodic benefit cost | $ | 19 | $ | 36 | $ | 1 | $ | 3 | $ | 58 | $ | 93 | $ | 5 | $ | 9 | |||||||||||||||
Praxair estimates that 2014 contributions to its pension plans will be in the area of $20 million, of which $14 million have been made through September�30, 2014.
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12. Commitments and Contingencies
Contingent Liabilities
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 companys consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the companys reported results of operations in any given period (see Note 17 to the consolidated financial statements of Praxairs 2013 Annual Report on Form 10-K).
Significant matters are:
" | 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 such disputes were enrolled in the Refis Program, subject to final calculation and review by the Brazilian federal government. The Company recorded estimated liabilities based on the terms of the Refis Program. Since 2009, Praxair has been unable to reach final agreement on the calculations and recently initiated litigation against the government in an attempt to resolve certain items. Open issues relate to the following matters: (i) application of cash deposits and net operating loss carryforwards to satisfy obligations, (ii) the amount of tax reductions available under the Refis Program, and (iii) income tax deductibility of payments. Although it is difficult to estimate the timing of resolution of legal matters in Brazil, it is possible that individual disputed matters may be resolved during the next year. |
" | At September�30, 2014 the most significant non-income and income tax claims in Brazil, after enrollment in the Refis Program, relate to state VAT tax matters associated with procedural issues and a federal income tax matter where the taxing authorities are challenging the tax rate that should be applied to income generated by a subsidiary company. The total estimated exposure relating to such claims, including interest and penalties, as appropriate, is approximately $190 million. Praxair has not recorded any liabilities related to such claims based on management judgments, after considering judgments and opinions of outside counsel. Because litigation in Brazil historically takes many years to resolve, it is very difficult to estimate the timing of resolution of these matters; however, it is possible that certain of these matters may be resolved within the near term. The company is vigorously defending against the proceedings. |
" | On September�1, 2010, CADE (Brazilian Administrative Council for Economic Defense) announced alleged anticompetitive activity on the part of five industrial gas companies in Brazil and imposed fines on all five companies. Originally, CADE imposed a civil fine of R$2.2 billion Brazilian reais (US$898 million) 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$694 million) due to a calculation error made by CADE. The amount of the fine is subject to indexation using SELIC. 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. 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.
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13. Segments
Sales and operating profit by segment for the quarters�and nine months ended September 30, 2014 and 2013 are shown below. For a description of Praxairs operating segments, refer to Note 18 to the consolidated financial statements of Praxairs 2013 Annual Report on Form 10-K.
�� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||
(Millions of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
SALES(a)� | |||||||||||||||
North America | $ | 1,639 | $ | 1,588 | $ | 4,847 | $ | 4,597 | |||||||
Europe | 385 | 386 | 1,190 | 1,138 | |||||||||||
South America | 523 | 494 | 1,520 | 1,561 | |||||||||||
Asia | 426 | 385 | 1,212 | 1,131 | |||||||||||
Surface Technologies | 171 | 160 | 514 | 488 | |||||||||||
Total sales | $ | 3,144 | $ | 3,013 | $ | 9,283 | $ | 8,915 | |||||||
�� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||
(Millions of dollars) | 2014 | 2013 | 2014 | 2013 | |||||||||||
OPERATING PROFIT | |||||||||||||||
North America | $ | 416 | $ | 406 | $ | 1,192 | $ | 1,145 | |||||||
Europe | 71 | 64 | 228 | 195 | |||||||||||
South America | 118 | 115 | 344 | 352 | |||||||||||
Asia | 75 | 67 | 226 | 191 | |||||||||||
Surface Technologies | 31 | 27 | 93 | 84 | |||||||||||
Segment operating profit | 711 | 679 | 2,083 | 1,967 | |||||||||||
Venezuela currency devaluation (Note 2) | (9 | ) | (32 | ) | |||||||||||
Total operating profit | $ | 711 | $ | 670 | $ | 2,083 | $ | 1,935 | |||||||
�
(a) | Intersegment sales, primarily from North America to other segments, were not significant for the quarters and nine months ended September 30, 2014 and 2013. |
22
14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters and nine months�ended�September 30, 2014 and 2013 is provided below:
Quarter�Ended�September 30, | |||||||||||||||||||||||
(Millions of dollars) | 2014 | 2013 | |||||||||||||||||||||
Activity | Praxair, Inc. Shareholders Equity | Noncontrolling Interests | Total Equity | Praxair, Inc. Shareholders Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||
Balance, beginning of period | $ | 6,911 | $ | 395 | $ | 7,306 | $ | 5,928 | $ | 357 | $ | 6,285 | |||||||||||
Net income (a) | 477 | 12 | 489 | 445 | 12 | 457 | |||||||||||||||||
Other comprehensive income (loss) | (566 | ) | (16 | ) | (582 | ) | 96 | 5 | 101 | ||||||||||||||
Noncontrolling interests: | |||||||||||||||||||||||
Additions (reductions) (b) | 4 | 4 | |||||||||||||||||||||
Dividends and other capital changes | (7 | ) | (7 | ) | (9 | ) | (9 | ) | |||||||||||||||
Redemption value adjustments | (27 | ) | (27 | ) | |||||||||||||||||||
Dividends to Praxair, Inc. common stock holders ($0.65 per share in 2014 and $0.60 per share in 2013) | (189 | ) | (189 | ) | (176 | ) | (176 | ) | |||||||||||||||
Issuances of common stock: | |||||||||||||||||||||||
For the dividend reinvestment and stock purchase plan | 2 | 2 | 2 | 2 | |||||||||||||||||||
For employee savings and incentive plans | 17 | 17 | 32 | 32 | |||||||||||||||||||
Purchases of common stock | (118 | ) | (118 | ) | (115 | ) | (115 | ) | |||||||||||||||
Tax benefit from share-based compensation | 4 | 4 | 7 | 7 | |||||||||||||||||||
Share-based compensation | 14 | 14 | 18 | 18 | |||||||||||||||||||
Balance, end of period | $ | 6,552 | $ | 388 | $ | 6,940 | $ | 6,210 | $ | 365 | $ | 6,575 | |||||||||||
23
Nine Months Ended September 30, | |||||||||||||||||||||||
(Millions of dollars) | 2014 | 2013 | |||||||||||||||||||||
Activity | Praxair, Inc. Shareholders Equity | Noncontrolling Interests | Total Equity | Praxair, Inc. Shareholders Equity | Noncontrolling Interests | Total Equity | |||||||||||||||||
Balance, beginning of period | $ | 6,609 | $ | 394 | $ | 7,003 | $ | 6,064 | $ | 357 | $ | 6,421 | |||||||||||
Net income (a) | 1,392 | 32 | 1,424 | 1,281 | 31 | 1,312 | |||||||||||||||||
Other comprehensive loss | (430 | ) | (17 | ) | (447 | ) | (287 | ) | 2 | (285 | ) | ||||||||||||
Noncontrolling interests: | |||||||||||||||||||||||
Additions (reductions) (b) | (24 | ) | 7 | (17 | ) | ||||||||||||||||||
Dividends and other capital changes | (28 | ) | (28 | ) | (25 | ) | (25 | ) | |||||||||||||||
Redemption value adjustments | (1 | ) | (1 | ) | (40 | ) | (40 | ) | |||||||||||||||
Dividends to Praxair, Inc. common stock holders ($1.95 per share in 2014 and $1.80 per share in 2013) | (570 | ) | (570 | ) | (531 | ) | (531 | ) | |||||||||||||||
Issuances of common stock: | |||||||||||||||||||||||
For the dividend reinvestment and stock purchase plan | 5 | 5 | 5 | 5 | |||||||||||||||||||
For employee savings and incentive plans | 69 | 69 | 92 | 92 | |||||||||||||||||||
Purchases of common stock | (568 | ) | (568 | ) | (458 | ) | (458 | ) | |||||||||||||||
Tax benefit from share-based compensation | 28 | 28 | 32 | 32 | |||||||||||||||||||
Share-based compensation | 42 | 42 | 52 | 52 | |||||||||||||||||||
Balance, end of period | $ | 6,552 | $ | 388 | $ | 6,940 | $ | 6,210 | $ | 365 | $ | 6,575 | |||||||||||
(a) | Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $1 million and $9 million for the quarter�and nine months ended September 30, 2014 ($5 million and $17 million for the same time periods in 2013, respectively), which is not part of total equity (see redeemable noncontrolling interests section below). |
(b) | Praxair increased 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. |
The components of AOCI are as follows:
September 30, | December 31, | ||||||
(Millions of dollars) | 2014 | 2013 | |||||
Cumulative translation adjustment - net of taxes | |||||||
North America | $ | (514 | ) | $ | (315 | ) | |
South America | (1,317 | ) | (1,179 | ) | |||
Europe | (138 | ) | (63 | ) | |||
Asia | (7 | ) | 21 | ||||
Surface Technologies | 8 | 28 | |||||
(1,968 | ) | (1,508 | ) | ||||
Derivatives - net of taxes | (2 | ) | (4 | ) | |||
Pension / OPEB funded status obligation - net of taxes | (441 | ) | (469 | ) | |||
$ | (2,411 | ) | $ | (1,981 | ) | ||
24
Redeemable Noncontrolling Interests
Noncontrolling interests with redemption features, such as put/sell options, that are not solely within the Companys 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 equity and does not impact net income.
Redeemable noncontrolling interests include Yara Praxair, a joint venture in Scandinavia, and two packaged gas distributors in the United States where the noncontrolling interests have put options. In Scandinavia, the noncontrolling shareholder has the right to sell its shares to Praxair starting in 2015 for a period of 4 years at a formula price. Praxair also obtained the right to purchase the shares held by the noncontrolling shareholder starting in 2017 for a period of 2 years, also at a formula price.
The following is a summary of the changes in redeemable noncontrolling interests for the nine months ended September 30, 2014 and 2013:�
(Millions of dollars) | 2014 | 2013 | |||||
Balance, January 1, | $ | 307 | $ | 252 | |||
Net income | 9 | 17 | |||||
Distributions to noncontrolling interest | (9 | ) | (9 | ) | |||
Redemption value adjustments/accretion | 1 | 40 | |||||
Foreign currency translation and other | (6 | ) | (10 | ) | |||
Purchase of noncontrolling interest * | (112 | ) | |||||
Balance, September 30, | $ | 190 | $ | 290 | |||
* In January 2014, Praxair acquired the redeemable noncontrolling interests related to Praxair Distribution Mid-Atlantic, LLC. The cash payment is shown in the financing section of the condensed consolidated statements of cash flows under the caption "Noncontrolling interest transactions and other".
25
Item�2. Managements Discussion and Analysis of Financial Condition and Results of Operations
Consolidated Results
Praxair's sales in the third quarter were 4% above the prior year. Excluding negative currency translation effects which reduced overall sales by 1%, sales grew 5% due to volume growth and higher overall pricing. Volume growth of 3% was primarily driven by new project start-ups in North America and Asia. Reported operating profit was 6% above the prior year, and 5% when compared to adjusted 2013 results. Operating profit growth was driven by higher pricing, primarily in North and South America. Reported net income and diluted earnings per share ("EPS") grew 7% and 9%, respectively, versus 2013 results. When compared to the 2013 adjusted results, net income and EPS grew 6% and 7% respectively. EPS grew faster than net income due to a lower number of shares outstanding. Cash flow from operations was strong at $713 million, which was 23% of sales.
Sales grew 4% in the nine months ended September 30, 2014. Excluding negative currency translation effects which reduced overall sales by 2%, sales grew 6% due to volume growth, higher overall pricing and acquisitions. Volume growth in North America and Asia included new project start-ups. Reported operating profit of $2,083 million grew 8% from the prior-year, and 6% when compared to the adjusted 2013 results. Operating profit grew primarily from higher pricing. Net income and EPS grew 9% and 10%, respectively, versus 2013 results. When compared to the 2013 adjusted results, net income and EPS grew 6% and 7% respectively. EPS grew faster than net income due to a lower number of shares outstanding. Cash flow from operations was strong at $2,096 million, which was 23% of sales and 7% above the comparable period in 2013.
Outlook
Diluted earnings per share for the fourth quarter of 2014 are expected to be in the range of $1.53 to $1.60.
Diluted earnings per share for the full year of 2014 are expected to be in the range of $6.23 to $6.30.
During the fourth quarter, Praxair will offer certain former employees who participate in either of the two U.S. qualified defined pension plans, the option to receive a one-time lump sum payment of their vested pension benefits under the plans rather than receiving lifetime annuity payments of these benefits. Depending on the acceptance rate of the lump sum payment option, a settlement of the related pension obligation could be triggered. As a result a pre-tax pension settlement charge of up to $15 million could be required to be recorded during the fourth quarter. Any potential pension settlement charge is not included in the above earnings guidance.
For the full year of 2014, Praxair expects sales in the area of $12.3 to $12.4 billion. Full-year capital expenditures are expected to be about $1.7 billion.
The companys core business is to build, own, and operate industrial gas plants in order to supply atmospheric and process gases to customers. As such, Praxair believes that its backlog is one indicator of future sales growth. At September�30, 2014, Praxairs backlog of 25 large projects under construction was $1.9 billion. This represents the total estimated capital cost of large plants under construction. About a third of this project backlog is in North America and approximately a third is in Asia, which includes projects in China, India and Korea. The rest is in Europe and South America. These plants will supply customers in the energy, chemical, manufacturing, electronics and metals markets.
Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via quarterly earnings releases and investor teleconferences. These updates are available on the companys website, www.praxair.com, but are not incorporated herein.
26
The following table provides summary data for the quarters�and�nine months ended September 30, 2014 and 2013:
�� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
(Dollar amounts in millions, except per share data) | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
Reported Amounts | |||||||||||||||||||||
Sales | $ | 3,144 | $ | 3,013 | 4 | �% | $ | 9,283 | $ | 8,915 | 4 | �% | |||||||||
Cost of sales, exclusive of depreciation and amortization | $ | 1,780 | $ | 1,697 | 5 | �% | $ | 5,273 | $ | 5,045 | 5 | �% | |||||||||
Gross margin (a) | $ | 1,364 | $ | 1,316 | 4 | �% | $ | 4,010 | $ | 3,870 | 4 | �% | |||||||||
As a percent of sales | 43.4 | % | 43.7 | % | 43.2 | % | 43.4 | % | |||||||||||||
Selling, general and administrative | $ | 327 | $ | 336 | (3 | )% | $ | 988 | $ | 1,017 | (3 | )% | |||||||||
As a percent of sales | 10.4 | % | 11.2 | % | 10.6 | % | 11.4 | % | |||||||||||||
Depreciation and amortization | $ | 301 | $ | 281 | 7 | �% | $ | 879 | $ | 822 | 7 | �% | |||||||||
Venezuela currency devaluation and other charges (b) | $ | $ | 9 | $ | $ | 32 | |||||||||||||||
Other income (expense) - net | $ | $ | 4 | $ | 12 | $ | 8 | ||||||||||||||
Operating profit | $ | 711 | $ | 670 | 6 | �% | $ | 2,083 | $ | 1,935 | 8 | �% | |||||||||
As a percent of sales | 22.6 | % | 22.2 | % | 22.4 | % | 21.7 | % | |||||||||||||
Interest expense - net | $ | 45 | $ | 41 | 10 | �% | $ | 134 | $ | 122 | 10 | �% | |||||||||
Effective tax rate | 28.1 | % | 27.8 | % | 28.0 | % | 28.3 | % | |||||||||||||
Income from equity investments | $ | 11 | $ | 8 | 38 | �% | $ | 30 | $ | 29 | 3 | �% | |||||||||
Noncontrolling interests | $ | (13 | ) | $ | (17 | ) | (24 | )% | $ | (41 | ) | $ | (48 | ) | (15 | )% | |||||
Net income - Praxair, Inc. | $ | 477 | $ | 445 | 7 | �% | $ | 1,392 | $ | 1,281 | 9 | �% | |||||||||
Diluted earnings per share | $ | 1.62 | $ | 1.49 | 9 | �% | $ | 4.70 | $ | 4.28 | 10 | �% | |||||||||
Diluted shares outstanding | 295,239 | 298,357 | (1 | )% | 296,240 | 299,077 | (1 | )% | |||||||||||||
2013 Adjusted Amounts (c) | |||||||||||||||||||||
Operating profit | $ | 711 | $ | 679 | 5 | �% | $ | 2,083 | $ | 1,967 | 6 | �% | |||||||||
As a percent of sales | 22.6 | % | 22.5 | % | 22.4 | % | 22.1 | % | |||||||||||||
Effective tax rate | 28.1 | % | 27.9 | % | 28.0 | % | 28.0 | % | |||||||||||||
Net income - Praxair, Inc. | $ | 477 | $ | 451 | 6 | �% | $ | 1,392 | $ | 1,310 | 6 | �% | |||||||||
Diluted earnings per share | $ | 1.62 | $ | 1.51 | 7 | �% | $ | 4.70 | $ | 4.38 | 7 | �% | |||||||||
�
(a) | Gross margin excludes depreciation and amortization expense. |
(b) | See Note 2 to the condensed consolidated financial statements. |
(c) | Adjusted amounts are non-GAAP measures which exclude the impact of the Venezuela currency devaluation in the first quarter of 2013 and the pension settlement charge in the third quarter of 2013 (see Note 2 to the condensed consolidated financial statements). A reconciliation of reported amounts to adjusted amounts can be found in the Non-GAAP Financial Measures section of this MD&A. |
27
Results of Operations
The changes in consolidated sales and operating profit compared to the prior year are attributable to the following:
�
� | Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | |||||||||
� | % Change | % Change | |||||||||
� | Sales | Operating�Profit | Sales | Operating�Profit | |||||||
Factors Contributing to Changes | |||||||||||
Volume | 3 | �% | 1 | �% | 3 | �% | 1 | �% | |||
Price | 2 | �% | 7 | �% | 2 | �% | 8 | �% | |||
Cost pass-through | �% | �% | �% | �% | |||||||
Currency | (1 | )% | (1 | )% | (2 | )% | (2 | )% | |||
Acquisitions/divestitures | �% | �% | 1 | �% | 1 | �% | |||||
Other | �% | (1 | )% | �% | �% | ||||||
Reported | 4 | �% | 6 | �% | 4 | �% | 8 | �% | |||
Venezuela currency devaluation and other charges | �% | (1 | )% | �% | (2 | )% | |||||
Adjusted | 4 | �% | 5 | �% | 4 | �% | 6 | �% | |||
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 | |||||||||||||
� | 2014 | 2013 | Organic�Sales* | 2014 | 2013 | Organic�Sales* | |||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 24 | % | 23 | % | 6 | �% | 24 | % | 24 | % | 3 | % | |||||
Metals | 17 | % | 17 | % | 3 | �% | 17 | % | 18 | % | 4 | % | |||||
Energy | 13 | % | 13 | % | 3 | �% | 13 | % | 12 | % | 8 | % | |||||
Chemicals | 10 | % | 11 | % | �% | 10 | % | 10 | % | 5 | % | ||||||
Electronics | 7 | % | 8 | % | 1 | �% | 7 | % | 8 | % | % | ||||||
Healthcare | 8 | % | 8 | % | 8 | �% | 8 | % | 8 | % | 4 | % | |||||
Food & Beverage | 8 | % | 8 | % | 8 | �% | 8 | % | 8 | % | 7 | % | |||||
Aerospace | 3 | % | 3 | % | (3 | )% | 3 | % | 3 | % | % | ||||||
Other | 10 | % | 9 | % | 19 | �% | 10 | % | 9 | % | 11 | % | |||||
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 | |||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||
Sales by Distribution Method** | |||||||||||
On- Site | 29 | % | 28 | % | 29 | % | 27 | % | |||
Merchant | 34 | % | 34 | % | 34 | % | 34 | % | |||
Packaged Gas | 29 | % | 29 | % | 29 | % | 29 | % | |||
Other | 8 | % | 9 | % | 8 | % | 10 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
** Prior year amounts have been reclassified to conform to the current presentation.
Sales grew $131 million, or 4%, in the third quarter ended September�30, 2014 versus the respective 2013 period. Underlying sales grew 5% from higher pricing and volume growth driven by new project start-ups primarily in North America and Asia. Sales growth was strongest to the manufacturing, healthcare and food & beverage end markets. For the nine-month period sales grew $368 million, or 4%. Underlying sales grew 5% from higher pricing, and volume growth primarily in North
28
America and Asia. Acquisitions, including NuCO2 and Dominion Technology Gases, acquired in 2013, contributed 1% to sales growth in the nine-month period.
Gross margin increased $48 million, or 4%, for the quarter and increased $140 million, or 4%, for the nine months ended September 30, 2014 versus the respective 2013 periods primarily due to higher sales. Cost of sales, exclusive of depreciation and amortization in both the quarter and nine-month periods ended September 30, 2014 included a $9 million benefit related to a change in accounting principle (see notes 1 and 4 to the condensed consolidated financial statements).
Selling, general and administrative expenses ("SGA") decreased $9 million, or 3%, in the quarter and decreased $29 million, or 3%, for the nine months ended September 30, 2014 versus the respective 2013 periods. The decrease in the third quarter was primarily due to lower costs, including incentive compensation, which decreased SGA by $8 million and currency effects which reduced SGA by $3 million, which were partially offset by an increase of $2 million each due to acquisitions and project start-ups. The decrease for the nine months ended September 30, 2014 was primarily due to lower costs, including incentive compensation, which decreased SGA by $24 million and currency effects which reduced SGA by $20 million, which were partially offset by an increase of $13 million due to acquisitions. As a result, SGA as a percent of sales was lower as compared to the prior year in both the quarter and nine-month periods.
Depreciation and amortization expense increased $20 million, or 7%, for the third quarter and increased $57 million, or 7%, for the nine months ended September 30, 2014 versus the respective 2013 periods primarily due to new project start-ups.
Other income (expense) net was zero in the third quarter, compared to a $4 million benefit in the prior-year quarter. The 2013 quarter included gains on assets sales. For the year-to-date period, other income was a $12 million benefit, compared to a $8 million benefit in the prior-year. Other income was higher for the year-to-date period primarily due to higher partnership income and an asset sale in South America.
Operating profit increased $41 million, or 6%, for the third quarter of 2014 versus the respective 2013 period and increased 5% versus 2013 adjusted operating profit. For the nine-month period operating profit increased $148 million, or 8% versus the respective 2013 period, and 6% versus 2013 adjusted operating profit. The increase in operating profit in both periods was primarily driven by higher gross margin and lower SGA expenses, partially offset by higher depreciation and amortization. A discussion of operating profit by segment is included in the segment discussion that follows.
Interest expense-net increased $4 million, or 10%, for the quarter and $12 million, or 10%, for the nine months versus the respective 2013 periods. Lower average interest rates reduced interest expense by $6 million and $26 million for the quarter and nine month periods, respectively. However, this decrease was more than offset by the impact of lower capitalized interest which increased interest expense by $8 million and $27 million for the quarter and nine month periods, respectively, and higher debt levels which also increased interest expense by $2 million and $11 million for the quarter and nine month periods, respectively.
The effective tax rate was approximately 28% for all periods presented.
Praxairs significant sources of equity income are in China, Italy, and the Middle East. For the quarter, equity income increased $3 million primarily from investments in Asia and for the nine months equity income increased $1 million, primarily from investments in Europe, versus the respective 2013 periods.
At September�30, 2014, 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). Non-controlling interests decreased $4 million for the quarter and $7 million for the nine months ended September 30, 2014 versus the respective periods in 2013 due primarily to the acquisition of the noncontrolling interest in a US packaged gas business in the first quarter of 2014.
Net income-Praxair, Inc. increased $32 million, or 7%, and $111 million, or 9% for the quarter and nine months ended September 30, 2014, versus the respective 2013 periods. Net income increased 6% in the quarter and nine-month periods from 2013 adjusted amounts, primarily due to higher operating profit partially offset by higher interest expense.
EPS of $1.62 for the quarter increased 9% from the prior-year on a reported basis, and increased 7% from 2013 adjusted EPS. For the nine-month period EPS of $4.70 increased 10% from 2013 reported EPS, and 7% from adjusted EPS. These increases for both the quarter and nine-month periods versus the respective prior-year periods are attributable to higher net income and reductions in the number of diluted shares outstanding as a result of the company's net repurchases of common stock.
29
Other Comprehensive Income
Other comprehensive loss for the third quarter of $588 million results from negative currency translation adjustments of $609 million, partially offset by a $21 million positive adjustment related to the funded status of retirement obligations. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars (see Currency section of the MD&A for exchange rates). The negative translation adjustments in the quarter resulted primarily from the strengthening of the U.S. dollar against most major currencies. The largest currency movements were $257 million in South America, principally related to Brazil, $204 million in North America related to Canada and Mexico, and $61 million in Europe related to Germany, Italy and Spain. The remaining adjustments relate to Asia and Surface Technologies.
Other comprehensive loss for the nine months ended September 30, 2014 of $453 million includes negative currency translation adjustments of $483 million, partially offset by a positive adjustment of $28 million related to the funded status of retirement obligations. The negative translation adjustment resulted primarily from currency movements of $138 million in South America, principally related to Brazil, $199 million in North America related to Canada and Mexico, and $75 million in Europe related to Germany, Italy and Spain. The remaining adjustments relate to Asia and Surface Technologies.
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) | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
SALES | |||||||||||||||||||||
North America | $ | 1,639 | $ | 1,588 | 3 | �% | $ | 4,847 | $ | 4,597 | 5 | �% | |||||||||
Europe | 385 | 386 | �% | 1,190 | 1,138 | 5 | �% | ||||||||||||||
South America | 523 | 494 | 6 | �% | 1,520 | 1,561 | (3 | )% | |||||||||||||
Asia | 426 | 385 | 11 | �% | 1,212 | 1,131 | 7 | �% | |||||||||||||
Surface Technologies | 171 | 160 | 7 | �% | 514 | 488 | 5 | �% | |||||||||||||
$ | 3,144 | $ | 3,013 | 4 | �% | $ | 9,283 | $ | 8,915 | 4 | �% | ||||||||||
OPERATING PROFIT | |||||||||||||||||||||
North America | $ | 416 | $ | 406 | 2 | �% | $ | 1,192 | $ | 1,145 | 4 | �% | |||||||||
Europe | 71 | 64 | 11 | �% | 228 | 195 | 17 | �% | |||||||||||||
South America | 118 | 115 | 3 | �% | 344 | 352 | (2 | )% | |||||||||||||
Asia | 75 | 67 | 12 | �% | 226 | 191 | 18 | �% | |||||||||||||
Surface Technologies | 31 | 27 | 15 | �% | 93 | 84 | 11 | �% | |||||||||||||
Segment operating profit | 711 | 679 | 5 | �% | 2,083 | 1,967 | 6 | �% | |||||||||||||
Venezuela currency devaluation (Note 2) | (9 | ) | (32 | ) | |||||||||||||||||
Total operating profit | $ | 711 | $ | 670 | 6 | �% | $ | 2,083 | $ | 1,935 | 8 | �% | |||||||||
30
North America
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
� | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
Sales | $ | 1,639 | $ | 1,588 | 3 | % | $ | 4,847 | $ | 4,597 | 5 | % | |||||||||
Cost of sales, exclusive of depreciation and amortization | 888 | 850 | 2,654 | 2,465 | |||||||||||||||||
Gross margin | 751 | 738 | 2,193 | 2,132 | |||||||||||||||||
Operating expenses | 181 | 186 | 546 | 569 | |||||||||||||||||
Depreciation and amortization | 154 | 146 | 455 | 418 | |||||||||||||||||
Operating profit | $ | 416 | $ | 406 | 2 | % | $ | 1,192 | $ | 1,145 | 4 | % | |||||||||
Margin % | 25.4 | % | 25.6 | % | 24.6 | % | 24.9 | % | |||||||||||||
�
� | Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | |||||||||
� | % Change | % Change | |||||||||
� | Sales | Operating�Profit | Sales | Operating�Profit | |||||||
Factors Contributing to Changes | |||||||||||
Volume | 1 | �% | (1 | )% | 3 | �% | �% | ||||
Price | 1 | �% | 4 | �% | 1 | �% | 5 | �% | |||
Cost pass-through | 1 | �% | �% | 1 | �% | �% | |||||
Currency | (1 | )% | (1 | )% | (1 | )% | (2 | )% | |||
Acquisitions/divestitures | 1 | �% | �% | 1 | �% | 1 | �% | ||||
Other | �% | �% | �% | �% | |||||||
3 | �% | 2 | �% | 5 | �% | 4 | �% | ||||
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 | |||||||||||||
� | 2014 | 2013 | Organic�Sales | 2014 | 2013 | Organic�Sales | |||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 29 | % | 29 | % | 4 | �% | 29 | % | 30 | % | 3 | �% | |||||
Metals | 12 | % | 12 | % | 4 | �% | 12 | % | 13 | % | 1 | �% | |||||
Energy | 20 | % | 18 | % | 2 | �% | 20 | % | 18 | % | 14 | �% | |||||
Chemicals | 10 | % | 10 | % | 2 | �% | 10 | % | 10 | % | 3 | �% | |||||
Electronics | 4 | % | 6 | % | 14 | �% | 4 | % | 5 | % | 3 | �% | |||||
Healthcare | 7 | % | 7 | % | 5 | �% | 7 | % | 7 | % | 2 | �% | |||||
Food�& Beverage | 9 | % | 9 | % | 4 | �% | 8 | % | 8 | % | 3 | �% | |||||
Aerospace | 1 | % | 1 | % | (12 | )% | 1 | % | 1 | % | (3 | )% | |||||
Other | 8 | % | 8 | % | 11 | �% | 9 | % | 8 | % | 10 | �% | |||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
�
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||
� | % of Sales | % of Sales | |||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||
Sales by Distribution Method | |||||||||||
On- Site | 30 | % | 30 | % | 31 | % | 28 | % | |||
Merchant | 36 | % | 36 | % | 36 | % | 36 | % | |||
Packaged Gas | 32 | % | 32 | % | 32 | % | 34 | % | |||
Other | 2 | % | 2 | % | 1 | % | 2 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
31
The North America segment includes Praxair's industrial gases operations in the United States, Canada and Mexico.
North America segment sales increased $51 million, or 3%, in the quarter as compared to the prior year and 4% ex-currency translation impacts. Underlying sales growth was 2%, driven primarily by higher volumes and price. Sales grew to the manufacturing, metals, food & beverage and healthcare end-markets. Higher sales to energy markets in the U.S. and Canada were partially offset by weaker sales in Mexico. Acquisitions of packaged gas distributors added 1% growth during the current quarter. Higher cost pass-through, primarily higher natural gas prices passed through to hydrogen customers, increased sales by 1%. For the year-to-date period, sales grew $250 million, or 5%. Underlying sales growth of 4% came primarily from higher pricing and higher volumes driven by new project start-ups. Cost pass-through added 1% growth. Packaged gases sales were higher for the nine months ended September 30, 2014, primarily due to growth in the U.S. business. Packaged gases sales are lower as a percentage of total sales for the segment as compared to the prior-year period, due to the contribution of new projects which increased the percentage of on-site sales.
North America segment operating profit increased $10 million, or 2%, in the quarter as compared to the prior year and 3% ex-currency translation impacts. The increase was primarily driven by higher pricing. Depreciation and amortization increased $8 million quarter over quarter primarily due primarily to acquisitions and new project start-ups. Operating profit increased $47 million, or 4%, for the nine months ended September 30, 2014 versus the respective 2013 period and 6% ex-currency, primarily due to higher pricing. Depreciation and amortization increased $37 million for the nine-month period primarily due to acquisitions and project start-ups. The 2014 quarter and nine-month periods included a $9 million benefit related to a change in accounting principle for LIFO inventories (see notes 1 and 4 to the condensed consolidated financial statements). The 2013 quarter and nine-month periods included a $23 million benefit related to a contract settlement in the United States.
Europe
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
� | 2014 | 2013 | Variance�% | 2014 | 2013 | Variance�% | |||||||||||||||
Sales | $ | 385 | $ | 386 | �% | $ | 1,190 | $ | 1,138 | 5 | % | ||||||||||
Cost of sales, exclusive of depreciation and amortization | 218 | 224 | 666 | 653 | |||||||||||||||||
Gross margin | 167 | 162 | 524 | 485 | |||||||||||||||||
Operating expenses | 53 | 55 | 168 | 165 | |||||||||||||||||
Depreciation and amortization | 43 | 43 | 128 | 125 | |||||||||||||||||
Operating profit | $ | 71 | $ | 64 | 11 | �% | $ | 228 | $ | 195 | 17 | % | |||||||||
Margin % | 18.4 | % | 16.6 | % | 19.2 | % | 17.1 | % | |||||||||||||
� | Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | |||||||||
� | %�Change | % Change | % Change | % Change | |||||||
� | Sales | Operating�Profit | Sales | Operating Profit | |||||||
Factors Contributing to Changes | |||||||||||
Volume | 1 | �% | 7 | % | 1 | �% | 5 | % | |||
Price | 1 | �% | 4 | % | 1 | �% | 6 | % | |||
Cost pass-through | (1 | )% | % | (1 | )% | % | |||||
Currency | (1 | )% | % | 2 | �% | 3 | % | ||||
Acquisitions/divestitures | �% | % | 2 | �% | 3 | % | |||||
Other | �% | % | �% | % | |||||||
�% | 11 | % | 5 | �% | 17 | % | |||||
32
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 | |||||||||||||
� | 2014 | 2013 | Organic�Sales | 2014 | 2013 | Organic�Sales | |||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 21 | % | 22 | % | 1 | �% | 22 | % | 22 | % | 4 | �% | |||||
Metals | 16 | % | 15 | % | 7 | �% | 16 | % | 16 | % | 2 | �% | |||||
Energy | 7 | % | 7 | % | 4 | �% | 7 | % | 5 | % | (1 | )% | |||||
Chemicals | 15 | % | 16 | % | (11 | )% | 15 | % | 17 | % | (8 | )% | |||||
Electronics | 7 | % | 7 | % | 1 | �% | 7 | % | 7 | % | �% | ||||||
Healthcare | 11 | % | 11 | % | 3 | �% | 11 | % | 11 | % | (1 | )% | |||||
Food & Beverage | 10 | % | 10 | % | 5 | �% | 9 | % | 9 | % | 7 | �% | |||||
Aerospace | % | 1 | % | (42 | )% | % | 1 | % | (15 | )% | |||||||
Other | 13 | % | 11 | % | 4 | �% | 13 | % | 12 | % | 3 | �% | |||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||
� | % of Sales | % of Sales | |||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||
Sales by Distribution Method | |||||||||||
On- Site | 18 | % | 19 | % | 18 | % | 20 | % | |||
Merchant | 35 | % | 34 | % | 35 | % | 34 | % | |||
Packaged Gas | 43 | % | 43 | % | 43 | % | 42 | % | |||
Other | 4 | % | 4 | % | 4 | % | 4 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
Europe segment sales in third quarter were relatively flat as compared to prior-year quarter. Sales excluding unfavorable currency and lower cost pass-through grew 2% for the quarter from moderately higher volumes and pricing. Volumes were higher in most countries. Sales growth was driven by metals, food & beverage, healthcare and manufacturing end-markets. For the nine-month period sales increased $52 million, or 5%, versus 2013. Excluding the impact of cost pass-through and currency, period sales increased 4% from the prior year. The increase was primarily due to an acquisition in Italy and moderately higher volumes and pricing.
Europe segment operating profit increased by $7 million, or 11% quarter-over-quarter, due to higher gross margin driven by higher pricing and productivity gains. For the nine-month period operating profit increased by $33 million, or 17% from 2013. Excluding currency impacts, the increase in operating profit was primarily from higher pricing, higher volumes and an acquisition in Italy.
South America
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
� | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
Sales | $ | 523 | $ | 494 | 6 | % | $ | 1,520 | $ | 1,561 | (3 | )% | |||||||||
Cost of sales, exclusive of depreciation and amortization | 287 | 271 | 842 | 867 | |||||||||||||||||
Gross margin | 236 | 223 | 678 | 694 | |||||||||||||||||
Operating expenses | 72 | 65 | 199 | 205 | |||||||||||||||||
Depreciation and amortization | 46 | 43 | 135 | 137 | |||||||||||||||||
Operating profit | $ | 118 | $ | 115 | 3 | % | $ | 344 | $ | 352 | (2 | )% | |||||||||
Margin % | 22.6 | % | 23.3 | % | 22.6 | % | 22.5 | % | |||||||||||||
33
Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | ||||||||||
� | %�Change | %�Change | %�Change | %�Change | |||||||
� | Sales | Operating�Profit | Sales | Operating�Profit | |||||||
Factors Contributing to Changes | |||||||||||
Volume | 3 | �% | (1 | )% | 1 | �% | (3 | )% | |||
Price | 5 | �% | 19 | �% | 4 | �% | 19 | �% | |||
Cost pass-through | �% | �% | �% | �% | |||||||
Currency | (2 | )% | (2 | )% | (8 | )% | (9 | )% | |||
Acquisitions/divestitures | �% | �% | �% | �% | |||||||
Other | �% | (13 | )% | �% | (9 | )% | |||||
6 | �% | 3 | �% | (3 | )% | (2 | )% | ||||
The following tables provide sales by end-market and distribution method:
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||
� | % of Sales | % Change Organic�Sales | % of Sales | % Change Organic�Sales | |||||||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 22 | % | 21 | % | 10 | �% | 21 | % | 22 | % | 3 | �% | |||||
Metals | 25 | % | 28 | % | (5 | )% | 28 | % | 29 | % | 2 | �% | |||||
Energy | 2 | % | 2 | % | 25 | �% | 2 | % | 2 | % | (53 | )% | |||||
Chemicals | 9 | % | 9 | % | 8 | �% | 9 | % | 9 | % | 47 | �% | |||||
Electronics | % | % | �% | % | % | �% | |||||||||||
Healthcare | 18 | % | 17 | % | 14 | �% | 17 | % | 17 | % | 9 | �% | |||||
Food & Beverage | 13 | % | 12 | % | 18 | �% | 13 | % | 11 | % | 17 | �% | |||||
Aerospace | % | % | �% | % | % | ||||||||||||
Other | 11 | % | 11 | % | 7 | �% | 10 | % | 10 | % | (3 | )% | |||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
�
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||
� | % of Sales | % of Sales | |||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||
Sales by Distribution Method | |||||||||||
On- Site | 25 | % | 24 | % | 26 | % | 25 | % | |||
Merchant | 43 | % | 43 | % | 42 | % | 43 | % | |||
Packaged Gas | 30 | % | 30 | % | 29 | % | 31 | % | |||
Other | 2 | % | 3 | % | 3 | % | 1 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
South America segment sales in the third quarter increased $29 million or 6% versus the prior-year quarter. Excluding unfavorable currency translation impacts of 2%, sales grew 8% primarily from higher pricing. Sales growth came from the manufacturing, healthcare and food and beverage end-markets. For the nine-month period sales decreased $41 million, or 3% from 2013. Sales growth excluding negative currency impacts was 5% due primarily to higher pricing.
Segment operating profit increased $3 million, or 3%, in the third quarter. For the nine month period operating profit decreased $8 million, or 2%. Excluding negative currency effects, operating profit increased 5% in the third quarter due to higher pricing partially offset by cost inflation. On-site volumes were lower than prior year, while merchant and packaged gas volumes remained stable with prior year. Excluding negative currency effects, operating profit increased 7% for the nine-month period due to higher price, partially offset by cost inflation.
Refer to the "Currency" section of this Management's Discussion and Analysis for a discussion of the currency environment in Venezuela.
34
Asia
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
� | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
Sales | $ | 426 | $ | 385 | 11 | % | $ | 1,212 | $ | 1,131 | 7 | % | |||||||||
Cost of sales, exclusive of depreciation and amortization | 278 | 249 | 779 | 745 | |||||||||||||||||
Gross margin | 148 | 136 | 433 | 386 | |||||||||||||||||
Operating expenses | 26 | 30 | 79 | 84 | |||||||||||||||||
Depreciation and amortization | 47 | 39 | 128 | 111 | |||||||||||||||||
Operating profit | $ | 75 | $ | 67 | 12 | % | $ | 226 | $ | 191 | 18 | % | |||||||||
Margin % | 17.6 | % | 17.4 | % | 18.6 | % | 16.9 | % | |||||||||||||
�
Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | ||||||||||
� | %�Change | %�Change | %�Change | %�Change | |||||||
� | Sales | Operating�Profit | Sales | Operating�Profit | |||||||
Factors Contributing to Changes | |||||||||||
Volume / Sale of Equipment | 10 | �% | 1 | % | 8 | �% | 7 | % | |||
Price | 1 | �% | 4 | % | 1 | �% | 6 | % | |||
Cost pass-through | (1 | )% | % | (1 | )% | % | |||||
Currency | 1 | �% | 1 | % | (1 | )% | % | ||||
Acquisitions/divestitures | �% | % | �% | % | |||||||
Other | �% | 6 | % | �% | 5 | % | |||||
11 | �% | 12 | % | 7 | �% | 18 | % | ||||
The following tables provide sales by end-market and distribution method:
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||
� | % of Sales | % Change Organic�Sales | % of Sales | % Change Organic�Sales | |||||||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 11 | % | 10 | % | 21 | �% | 10 | % | 11 | % | (1 | )% | |||||
Metals | 28 | % | 28 | % | 8 | �% | 28 | % | 27 | % | 13 | �% | |||||
Energy | 2 | % | 3 | % | (8 | )% | 2 | % | 2 | % | 54 | �% | |||||
Chemicals | 11 | % | 14 | % | (3 | )% | 12 | % | 13 | % | (2 | )% | |||||
Electronics | 29 | % | 33 | % | (6 | )% | 31 | % | 34 | % | �% | ||||||
Healthcare | 1 | % | 1 | % | �% | 1 | % | 1 | % | 14 | �% | ||||||
Food & Beverage | 2 | % | 2 | % | �% | 2 | % | 2 | % | (2 | )% | ||||||
Aerospace | % | % | �% | % | % | �% | |||||||||||
Other | 16 | % | 9 | % | 86 | �% | 14 | % | 10 | % | 45 | �% | |||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
�
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||
� | % of Sales | % of Sales | |||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||
Sales by Distribution Method | |||||||||||
On- Site | 54 | % | 48 | % | 51 | % | 47 | % | |||
Merchant | 27 | % | 28 | % | 28 | % | 29 | % | |||
Packaged Gas | 11 | % | 12 | % | 12 | % | 11 | % | |||
Other | 8 | % | 12 | % | 9 | % | 13 | % | |||
100 | % | 100 | % | 100 | % | 100 | % | ||||
35
Asia segment sales increased $41 million, or 11%, in the third quarter as compared to the prior year. Volume growth of 10% came from new project start-ups in India and Korea and included $29 million related to the sale of equipment to a joint venture in China. Higher pricing contributed to a 1% increase in sales and was primarily due to higher helium pricing. Cost pass-through related to the contractual pass-through of precious metals and power costs decreased sales by 1%, with minimal impact on operating profit. By end-market, the strongest sales growth came from metals and manufacturing. The sale of equipment in China coupled with higher on-site volumes in India and Korea accounted for the increase in on-site sales as a percentage of total segment sales. For the year-to-date period, sales increased $81 million, or 7%. Volume growth of 8% was primarily driven by new project start-ups in China, India and Korea and included $47 million related to the sale of equipment which is shown within the other end-market.
Asia segment operating profit increased $8 million, or 12% for the third quarter 2014 as compared to the prior year. Higher volumes and pricing resulted in a 5% increase. Depreciation and amortization expense increased $8 million as compared to the prior-year quarter primarily due to new plant start-ups. Operating profit increased $35 million, or 18%, for the nine months ended September 30, 2014 as compared to the prior year. Higher volumes and pricing resulted in a 13% increase. The 2013 quarter and nine-month periods included a benefit from the settlement of a prior-year receivable for $8 million in China ($3 million after-tax and noncontrolling interest). Lower operating expenses contributed to the increase in operating profit for both periods.
Surface Technologies
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||||||
� | 2014 | 2013 | Variance | 2014 | 2013 | Variance | |||||||||||||||
Sales | $ | 171 | $ | 160 | 7 | % | $ | 514 | $ | 488 | 5 | % | |||||||||
Cost of sales, exclusive of depreciation and amortization | 109 | 103 | 332 | 315 | |||||||||||||||||
Gross margin | 62 | 57 | 182 | 173 | |||||||||||||||||
Operating expenses | 20 | 20 | 56 | 58 | |||||||||||||||||
Depreciation and amortization | 11 | 10 | 33 | 31 | |||||||||||||||||
Operating profit | $ | 31 | $ | 27 | 15 | % | $ | 93 | $ | 84 | 11 | % | |||||||||
Margin % | 18.1 | % | 16.9 | % | 18.1 | % | 17.2 | % | |||||||||||||
�
� | Quarter�Ended�September 30, 2014 vs. 2013 | Nine Months Ended September 30, 2014 vs. 2013 | |||||||||
� | %�Change | % Change | % Change | % Change | |||||||
� | Sales | Operating�Profit | Sales | Operating Profit | |||||||
Factors�Contributing�to�Changes | |||||||||||
Volume/Price | 3 | �% | 11 | �% | 1 | % | 5 | % | |||
Cost pass-through | �% | �% | % | % | |||||||
Currency | 1 | �% | 1 | �% | 1 | % | 1 | % | |||
Acquisitions/divestitures | (1 | )% | (1 | )% | % | % | |||||
Other* | 4 | �% | 4 | �% | 3 | % | 5 | % | |||
7 | �% | 15 | �% | 5 | % | 11 | % | ||||
* Other includes business transfers.
36
The following table provides sales by end-market:
� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||||
� | % of Sales | %�Change | % of Sales | % Change | |||||||||||||
� | 2014 | 2013 | Organic�Sales | 2014 | 2013 | Organic�Sales | |||||||||||
Sales by End Markets | |||||||||||||||||
Manufacturing | 13 | % | 14 | % | % | 13 | % | 13 | % | 1 | % | ||||||
Metals | 8 | % | 8 | % | % | 8 | % | 8 | % | 6 | % | ||||||
Energy | 28 | % | 28 | % | 10 | % | 28 | % | 28 | % | % | ||||||
Chemicals | 3 | % | 2 | % | 26 | % | 2 | % | 2 | % | % | ||||||
Electronics | % | 1 | % | % | 1 | % | 1 | % | % | ||||||||
Healthcare | % | % | % | % | % | % | |||||||||||
Food & Beverage | 3 | % | 2 | % | 16 | % | 3 | % | 3 | % | 5 | % | |||||
Aerospace | 34 | % | 35 | % | 3 | % | 33 | % | 34 | % | 2 | % | |||||
Other | 11 | % | 10 | % | 9 | % | 12 | % | 11 | % | 12 | % | |||||
100 | % | 100 | % | 100 | % | 100 | % | ||||||||||
Surface Technologies segment sales increased $11 million, or 7%, in the quarter versus the prior-year period. Underlying sales increased 3% primarily from higher sales to the energy and aerospace end-markets. Currency increased sales by 1% primarily due to a stronger British pound versus the U.S. dollar. For the nine-month period, underlying sales increased 1% also due to higher sales to aerospace and industrial customers.
Surface Technologies segment operating profit increased $4 million, or 15%, in the third quarter primarily due to higher pricing and volume. Operating profit increased $9 million, or 11%, for the nine months ended September 30, 2014 versus the respective 2013 periods, primarily from higher pricing and productivity gains which more than offset cost inflation.
37
Currency
The results of Praxairs non-U.S. operations are translated to the companys reporting currency, the U.S. dollar, from the functional currencies. For most foreign operations, Praxair uses the local currency as its functional currency. There is inherent variability and unpredictability in the relationship of these functional currencies to the U.S. dollar and such currency movements may materially impact Praxairs results of operations in any given period.
To help understand the reported results, the following is a summary of the significant currencies underlying Praxairs consolidated results and the exchange rates used to translate the financial statements (rates of exchange expressed in units of local currency per U.S. dollar):
�
� | Percentage of YTD 2014 Consolidated Sales (a) | Exchange�Rate�for Income�Statement | Exchange Rate for Balance Sheet | |||||||||||
� | Year-To-Date�Average | September 30, | December�31, | |||||||||||
Currency | 2014 | 2013 | 2014 | 2013 | ||||||||||
Brazilian real | 13 | % | 2.29 | 2.11 | 2.45 | 2.34 | ||||||||
Euro | 12 | % | 0.74 | 0.76 | 0.79 | 0.73 | ||||||||
Canadian dollar | 8 | % | 1.09 | 1.02 | 1.12 | 1.06 | ||||||||
Mexican peso | 6 | % | 13.12 | 12.67 | 13.43 | 13.04 | ||||||||
Chinese yuan | 6 | % | 6.17 | 6.18 | 6.14 | 6.05 | ||||||||
Indian rupee | 3 | % | 60.73 | 57.18 | 61.76 | 61.80 | ||||||||
Korean won | 3 | % | 1,042 | 1,105 | 1,055 | 1,050 | ||||||||
Norwegian krone | 1 | % | 6.11 | 5.81 | 6.43 | 6.07 | ||||||||
Singapore dollar | <1% | 1.26 | 1.25 | 1.28 | 1.26 | |||||||||
Argentine peso | <1% | 7.97 | 5.27 | 8.43 | 6.52 | |||||||||
Colombian peso | <1% | 1,942 | 1,853 | 2,022 | 1,927 | |||||||||
Russian ruble | <1% | 35.43 | 31.58 | 39.60 | 32.87 | |||||||||
Thailand bhat | <1% | 32.40 | 30.36 | 32.43 | 32.71 | |||||||||
Venezuelan bolivar fuerte (b) | <1% | 6.30 | 5.87 | 6.30 | 6.30 | |||||||||
�
(a) | Certain Surface Technologies segment sales are included in European, Indian and Brazilian sales. |
(b) | Effective March 24, 2014, the Venezuelan government introduced a new exchange control market-based mechanism (referred to as SICAD 2 ) which may allow companies to obtain U.S. dollars for any purpose, including dividend remittances. Through September 30, 2014, SICAD 2 market-based transactions were limited and it is not clear whether the Company will be able to exchange Venezuelan bolivar fuerte ("VEF") to U.S. dollars to pay its foreign denominated obligations and/or to make dividend and royalty remittances. Therefore, Praxair has continued to use the official 6.3 exchange rate for remeasurement purposes and will continue to monitor current developments. At September 30, 2014 the SICAD 2 rate was 49.99 VEF per U.S. dollar. In Venezuela, Praxairs 2014 year-to-date sales were approximately $84 million and at September 30, 2014 Praxairs net asset position was approximately $127 million, including $55 million of VEF denominated cash. If the VEF devalued from the current official 6.3 rate or if the Company determined that it was more appropriate to use another exchange rate for translation purposes, it would result in a charge to earnings in the period of devaluation. Based on its September 30, 2014 balance sheet, Praxair estimates that it would incur a pre-tax charge of approximately $12 million for every 10% devaluation of the VEF versus the U.S. dollar. |
38
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion that follows:
(Millions of dollars) | Nine Months Ended September 30, | ||||||
� | 2014 | 2013 | |||||
NET CASH PROVIDED BY (USED FOR): | |||||||
OPERATING ACTIVITIES | |||||||
Net income - Praxair, Inc. plus depreciation and amortization | $ | 2,271 | $ | 2,103 | |||
Noncontrolling interests | 41 | 48 | |||||
Net income plus depreciation and amortization (including noncontrolling interests) | 2,312 | 2,151 | |||||
Adjustments to reconcile net income to net cash provided by operating activities: | |||||||
Venezuela currency devaluation (a)� | 23 | ||||||
Deferred income taxes | (32 | ) | 88 | ||||
Working capital | (181 | ) | (238 | ) | |||
Pension contributions | (14 | ) | (48 | ) | |||
Other - net | 11 | (23 | ) | ||||
Net cash provided by operating activities | $ | 2,096 | $ | 1,953 | |||
INVESTING ACTIVITIES | |||||||
Capital expenditures | (1,207 | ) | (1,504 | ) | |||
Acquisitions, net of cash acquired | (191 | ) | (1,311 | ) | |||
Divestitures and asset sales | 86 | 65 | |||||
Net cash used for investing activities | $ | (1,312 | ) | $ | (2,750 | ) | |
FINANCING ACTIVITIES | |||||||
Debt increases (reductions) - net | 394 | 1,670 | |||||
Issuances (purchases) of common stock - net | (477 | ) | (350 | ) | |||
Cash dividends - Praxair, Inc. shareholders | (570 | ) | (531 | ) | |||
Excess tax benefit on share-based compensation | 28 | 31 | |||||
Noncontrolling interest transactions and other | (123 | ) | (24 | ) | |||
Net cash (used for) provided by financing activities | $ | (748 | ) | $ | 796 | ||
�
(a) | See Note 2 to the condensed consolidated financial statements. |
Cash Flow from Operations
Cash provided by operations of $2,096 million for the nine months ended September�30, 2014 increased $143 million, or 7%, versus 2013. The increase was primarily due to higher net income plus depreciation and amortization expense.
Praxair estimates that total 2014 contributions to its pension plans will be in the area of $20 million, of which $14 million have been made through September�30, 2014. At a minimum, Praxair contributes to its pension plans to comply with local regulatory requirements (e.g., ERISA in the United States). Discretionary contributions in excess of the local minimum requirements are made based on many factors, including long-term projections of the plans' funded status, the economic environment, potential risk of overfunding, pension insurance costs and alternative uses of the cash. Changes to these factors can impact the amount and timing of discretionary contributions from year to year.
Investing
Net cash used for investing of $1,312 million for the nine months ended September�30, 2014 decreased $1,438 million versus 2013 primarily due to lower acquisition expenditures, primarily the acquisition of NuCO2 in 2013.
Capital expenditures for the nine months ended September�30, 2014 were $1,207 million, $297 million lower than the prior year. Capital expenditures related primarily to the construction of large growth projects.
39
Acquisitions of $191 million included the acquisition of an industrial gases business in Italy and packaged gas businesses in North and South America. Acquisitions in the prior-year period of $1,311 were primarily the acquisition of NuCO2 in North America. (see Note 3 to the condensed consolidated financial statements).
For the nine months ended September�30, 2014 divestitures and asset sales were $86 million, primarily the sale of Praxair's industrial gas business in France in the first quarter.
Financing
Cash used for financing activities was $748 million for the nine-month period. Cash dividends of $570 million were above prior year due to an increase in dividends per share to $1.95 from $1.80. In 2014, noncontrolling interest transactions and other includes the purchase of the redeemable noncontrolling interests of Praxair Distribution Mid-Atlantic, LLC (see Note 14 to the condensed consolidated financial statements).
In March 2014, Praxair issued �600 million ($754 million) of 1.50% Euro-denominated notes due 2020, and repaid $300 million of 4.375% notes that became due.
Other Financial Data
Praxair's debt to capital ratio was 55.7% at September�30, 2014 versus 56.4% at September�30, 2013. The decrease is primarily attributable to a higher capital base due to higher net income partially offset by stock repurchases, dividends and other comprehensive income.
After-tax return on capital ("ROC") decreased to 12.6% for the four-quarter trailing period ended September�30, 2014 versus 12.8% for the 2013 period. This decrease reflects higher average debt levels due primarily to acquisitions in 2013.
Return on equity ("ROE") for the four-quarter trailing period ended September�30, 2014 remained strong at 28.2%.
�
See the "Non-GAAP Financial Measures" section below for definitions and reconciliations of these non-GAAP measures to reported GAAP amounts.
Legal Proceedings
See Note 12 to the condensed consolidated financial statements.
Non-GAAP Financial Measures
The following non-GAAP measures are intended to supplement investors understanding of the companys financial information by providing measures which investors, financial analysts and management use to help evaluate the companys financial leverage, return on net assets employed and operating performance. Special items which the company does not believe to be indicative of on-going business trends are excluded from these calculations so that investors can better evaluate and analyze historical and future business trends on a consistent basis. Definitions of these non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures.
The following are the non-GAAP measures presented in the MD&A:
�
� | September 30, | ||||
(Dollar amounts in millions, except per share data) | 2014 | 2013 | |||
Debt-to-capital | 55.7 | % | 56.4 | % | |
After-tax return on capital | 12.6 | % | 12.8 | % | |
Return on equity | 28.2 | % | 28.4 | % | |
Debt-to-adjusted EBITDA | 2.2 | 2.2 | |||
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� | Quarter�Ended�September 30, | Nine Months Ended September 30, | |||||||||||||
� | 2014 | 2013 | 2014 | 2013 | |||||||||||
2013 Adjusted amounts:* | |||||||||||||||
Operating profit | $ | 711 | $ | 679 | $ | 2,083 | $ | 1,967 | |||||||
As a percent of sales | 22.6 | % | 22.5 | % | 22.4 | % | 22.1 | % | |||||||
EBITDA | $ | 1,023 | $ | 968 | $ | 2,992 | $ | 2,818 | |||||||
EBITDA margin | 32.5 | % | 32.1 | % | 32.2 | % | 31.6 | % | |||||||
Effective tax rate | 28.1 | % | 27.9 | % | 28.0 | % | 28.0 | % | |||||||
Net income - Praxair, Inc. | $ | 477 | $ | 451 | $ | 1,392 | $ | 1,310 | |||||||
Diluted earnings per share | $ | 1.62 | $ | 1.51 | $ | 4.70 | $ | 4.38 | |||||||
* | The adjusted amounts for 2013 exclude the impact of the first quarter Venezuela currency devaluation of $23 million ($23 million net of tax). See Note 2 to the condensed consolidated financial statements. |
Debt-to-Capital Ratio
The debt-to-capital ratio is a measure used by investors, financial analysts and management to provide a measure of financial leverage and insights into how the company is financing its operations.
Nine Months Ended September 30, | |||||||
2014 | 2013 | ||||||
(Dollar amounts in millions) | � | � | � | ||||
Debt | $ | 9,121 | $ | 9,026 | |||
Less: cash and cash equivalents | (168 | ) | (134 | ) | |||
Net debt | 8,953 | 8,892 | |||||
Equity and redeemable noncontrolling interests | |||||||
Redeemable noncontrolling interests | 190 | 290 | |||||
Praxair, Inc. shareholders equity | 6,552 | 6,210 | |||||
Noncontrolling interests | 388 | 365 | |||||
Total equity and redeemable noncontrolling interests | 7,130 | 6,865 | |||||
Capital | $ | 16,083 | $ | 15,757 | |||
DEBT-TO-CAPITAL RATIO | 55.7 | % | 56.4 | % | |||
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After-tax Return on Capital (ROC)
After-tax return on capital is a measure used by investors, financial analysts and management to evaluate the return on net assets employed in the business. ROC measures the after-tax operating profit that the company was able to generate with the investments made by all parties in the business (debt, noncontrolling interests and Praxair, Inc. shareholders equity).
� | 2014 | 2013 | |||||||||||||||||||||
� | Four Quarter Trailing | Nine Months Ended | Three Months Ended | Four Quarter Trailing | Nine Months Ended | Three Months Ended | |||||||||||||||||
September 30, 2014 | December 31, 2013 | September 30, 2013 | December 31, 2012 | ||||||||||||||||||||
(Dollar amounts in millions) | � | � | � | � | � | � | |||||||||||||||||
Adjusted operating profit (see below) | $ | 2,773 | $ | 2,083 | $ | 690 | $ | 2,583 | $ | 1,967 | $ | 616 | |||||||||||
Less: adjusted income taxes (see below) | (728 | ) | (546 | ) | (182 | ) | (678 | ) | (516 | ) | (162 | ) | |||||||||||
Less: tax benefit on interest expense* | (49 | ) | (38 | ) | (11 | ) | (43 | ) | (33 | ) | (10 | ) | |||||||||||
Add: equity income | 39 | 30 | 9 | 38 | 29 | 9 | |||||||||||||||||
Net operating profit after-tax (NOPAT) | $ | 2,035 | $ | 1,529 | $ | 506 | $ | 1,900 | $ | 1,447 | $ | 453 | |||||||||||
Capital: | |||||||||||||||||||||||
September 30th, | $ | 16,083 | $ | 15,757 | |||||||||||||||||||
June 30th, | $ | 16,492 | $ | 15,548 | |||||||||||||||||||
March 31st, | $ | 16,319 | $ | 15,344 | |||||||||||||||||||
December 31st, 2013 & 2012 | $ | 15,983 | $ | 13,878 | |||||||||||||||||||
September 30th, 2013 & 2012 | $ | 15,757 | $ | 13,617 | |||||||||||||||||||
Five-quarter average | $ | 16,127 | $ | 14,829 | |||||||||||||||||||
After-tax ROC | 12.6 | % | 12.8 | % | |||||||||||||||||||
*� | Tax benefit on interest expense is computed using the effective rate. The effective tax rate used was 28% for 2014 and 2013. |
Return on Praxair, Inc. Shareholders Equity (ROE)
Return on Praxair, Inc. shareholders equity is a measure used by investors, financial analysts and management to evaluate operating performance from a Praxair shareholder perspective. ROE measures the net income attributable to Praxair, Inc. that the company was able to generate with the money shareholders have invested.
� | 2014 | 2013 | |||||||||||||||||||||
� | Four Quarter Trailing | Nine Months Ended | Three Months Ended | Four Quarter Trailing | Nine Months Ended | Three Months Ended | |||||||||||||||||
September 30, 2014 | December 31, 2013 | September 30, 2013 | December 31, 2012 | ||||||||||||||||||||
(Dollar amounts in millions) | � | � | � | � | � | � | |||||||||||||||||
Adjusted Net income - Praxair, Inc. (see below) | $ | 1,854 | $ | 1,392 | $ | 462 | $ | 1,724 | $ | 1,310 | $ | 414 | |||||||||||
Praxair, Inc. shareholders equity | |||||||||||||||||||||||
September 30th, | $ | 6,552 | $ | 6,210 | |||||||||||||||||||
June 30th, | $ | 6,911 | $ | 5,928 | |||||||||||||||||||
March 31st, | $ | 6,600 | $ | 6,169 | |||||||||||||||||||
December 31st, 2013 & 2012 | $ | 6,609 | $ | 6,064 | |||||||||||||||||||
September 30th, 2013 & 2012 | $ | 6,210 | $ | 6,015 | |||||||||||||||||||
Five-quarter average | $ | 6,576 | $ | 6,077 | |||||||||||||||||||
ROE | 28.2 | % | 28.4 | % | |||||||||||||||||||
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Adjusted EBITDA, Adjusted EBITDA Margin and Debt-to-Adjusted EBITDA Ratio
These measures are used by investors, financial analysts and management to assess a companys ability to meet its financial obligations.
Quarter�Ended�September 30, | |||||||||||||||||||||||
2014 | 2013 | ||||||||||||||||||||||
(Dollar amounts in millions) | |||||||||||||||||||||||
Adjusted net income - Praxair, Inc. (see below) | $ | 477 | $ | 451 | |||||||||||||||||||
Add: noncontrolling interest | 13 | 17 | |||||||||||||||||||||
Add: interest expense - net | 45 | 41 | |||||||||||||||||||||
Add: adjusted income taxes (see below) | 187 | 178 | |||||||||||||||||||||
Add: depreciation and amortization | 301 | 281 | |||||||||||||||||||||
Adjusted EBITDA | $ | 1,023 | $ | 968 | |||||||||||||||||||
Reported Sales | 3,144 | 3,013 | |||||||||||||||||||||
Adjusted EBITDA Margin | 32.5 | % | 32.1 | % | |||||||||||||||||||
� | 2014 | 2013 | |||||||||||||||||||||
� | Four Quarter Trailing | Nine Months Ended | Three Months Ended | Four Quarter Trailing | Nine Months Ended | Three Months Ended | |||||||||||||||||
September 30, 2014 | December 31, 2013 | September 30, 2013 | December 31, 2012 | ||||||||||||||||||||
(Dollar amounts in millions) | � | � | � | � | � | � | |||||||||||||||||
Adjusted net income - Praxair, Inc. (see below) | $ | 1,854 | $ | 1,392 | $ | 462 | $ | 1,724 | $ | 1,310 | $ | 414 | |||||||||||
Add: adjusted noncontrolling interest (see below) | 58 | 41 | 17 | 62 | 48 | 14 | |||||||||||||||||
Add: interest expense - net | 172 | 134 | 38 | 157 | 122 | 35 | |||||||||||||||||
Add: adjusted income taxes (see below) | 728 | 546 | 182 | 678 | 516 | 162 | |||||||||||||||||
Add: depreciation and amortization | 1,166 | 879 | 287 | 1,076 | 822 | 254 | |||||||||||||||||
Adjusted EBITDA | $ | 3,978 | $ | 2,992 | $ | 986 | $ | 3,697 | $ | 2,818 | $ | 879 | |||||||||||
Reported Sales | 9,283 | 8,915 | |||||||||||||||||||||
Adjusted EBITDA Margin | 32.2 | % | 31.6 | % | |||||||||||||||||||
Net Debt: | |||||||||||||||||||||||
September 30th, | $ | 8,953 | $ | 8,892 | |||||||||||||||||||
June 30th, | $ | 8,992 | $ | 9,004 | |||||||||||||||||||
March 31st, | $ | 9,126 | $ | 8,563 | |||||||||||||||||||
December 31st, 2013 & 2012 | $ | 8,673 | $ | 7,205 | |||||||||||||||||||
September 30th, 2013 & 2012 | $ | 8,892 | $ | 7,028 | |||||||||||||||||||
Five-quarter average | $ | 8,927 | $ | 8,138 | |||||||||||||||||||
DEBT-TO-ADJUSTED EBITDA RATIO | 2.2 | 2.2 | |||||||||||||||||||||
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Adjusted Amounts
Adjusted amounts for the quarter ended September 30, 2013 exclude the impact of the Venezuela currency devaluation. Adjusted amounts for the nine months ended September 30, 2013 exclude the impact of the Venezuela currency devaluation and pension settlement. Adjusted amounts for the three months ended December 31, 2013 exclude the impact of the bond redemption charge and income tax benefit. The company does not believe these items are indicative of on-going business trends and, accordingly, the impact is excluded from the reported amounts so that investors can better evaluate and analyze historical and future business trends on a consistent basis. For a description of these items, refer to Notes 2, 5 & 11 to the consolidated financial statements of Praxairs 2013 Annual Report on Form 10-K.
Certain amounts for 2014 and 2012 have been included for reference purposes and to facilitate the calculations contained herein.
� | Quarter Ended September 30, | Nine Months Ended September 30, | Quarter Ended December 31, | ||||||||||||||||||||
(Dollar amounts in millions, except per share data) | 2014 | 2013 | 2014 | 2013 | 2013 | 2012 | |||||||||||||||||
Adjusted Operating Profit | |||||||||||||||||||||||
Reported operating profit | $ | 711 | $ | 670 | $ | 2,083 | $ | 1,935 | $ | 690 | $ | 616 | |||||||||||
Add: Venezuela currency devaluation | 23 | ||||||||||||||||||||||
Add: Pension settlement charge | 9 | 9 | |||||||||||||||||||||
Total adjustments | 9 | 32 | |||||||||||||||||||||
Adjusted operating profit | $ | 711 | $ | 679 | $ | 2,083 | $ | 1,967 | $ | 690 | $ | 616 | |||||||||||
Reported percent change | 6 | % | 8 | % | |||||||||||||||||||
Adjusted percent change | 5 | % | 6 | % | |||||||||||||||||||
Adjusted Interest Expense | |||||||||||||||||||||||
Reported interest expense | $ | 45 | $ | 41 | $ | 134 | $ | 122 | $ | 56 | $ | 35 | |||||||||||
Less: Bond redemption | (18 | ) | |||||||||||||||||||||
��Total adjustments | (18 | ) | |||||||||||||||||||||
Adjusted interest expense | $ | 45 | $ | 41 | $ | 134 | $ | 122 | $ | 38 | $ | 35 | |||||||||||
Adjusted Income Taxes and Effective Tax Rate | |||||||||||||||||||||||
Reported income taxes | $ | 187 | $ | 175 | $ | 546 | $ | 513 | $ | 136 | $ | 162 | |||||||||||
Add: Bond redemption | 6 | ||||||||||||||||||||||
Add: Income tax benefit | 40 | ||||||||||||||||||||||
Add: Pension settlement charge | 3 | 3 | |||||||||||||||||||||
Total adjustments | 3 | 3 | 46 | ||||||||||||||||||||
Adjusted income taxes | $ | 187 | $ | 178 | $ | 546 | $ | 516 | $ | 182 | $ | 162 | |||||||||||
44
� | Quarter Ended September 30, | Nine Months Ended September 30, | Quarter Ended December 31, | ||||||||||||||||||||
(Dollar amounts in millions, except per share data) | 2014 | 2013 | 2014 | 2013 | 2013 | 2012 | |||||||||||||||||
Adjusted Effective Tax Rate | |||||||||||||||||||||||
Reported income before income taxes and equity investments | $ | 666 | $ | 629 | $ | 1,949 | $ | 1,813 | $ | 634 | $ | 581 | |||||||||||
Add: Bond redemption | 18 | ||||||||||||||||||||||
Add: Pension settlement charge | 9 | 9 | |||||||||||||||||||||
Add: Venezuela currency devaluation | 23 | ||||||||||||||||||||||
Total adjustments | 9 | 32 | 18 | ||||||||||||||||||||
Adjusted income before income taxes and equity investments | $ | 666 | $ | 638 | $ | 1,949 | $ | 1,845 | $ | 652 | $ | 581 | |||||||||||
Adjusted effective tax rate | 28.1 | % | 27.9 | % | 28.0 | % | 28.0 | % | 27.9 | % | 27.9 | % | |||||||||||
Adjusted Noncontrolling Interests | |||||||||||||||||||||||
Reported noncontrolling interests | $ | 13 | $ | 17 | $ | 41 | $ | 48 | $ | 33 | $ | 14 | |||||||||||
Less: Income tax benefit | (16 | ) | |||||||||||||||||||||
Total adjustments | (16 | ) | |||||||||||||||||||||
Adjusted Noncontrolling Interests | $ | 13 | $ | 17 | $ | 41 | $ | 48 | $ | 17 | $ | 14 | |||||||||||
Adjusted Net Income - Praxair, Inc. | |||||||||||||||||||||||
Reported net income - Praxair, Inc. | $ | 477 | $ | 445 | $ | 1,392 | $ | 1,281 | $ | 474 | $ | 414 | |||||||||||
Add: Bond redemption | 12 | ||||||||||||||||||||||
Less: Income tax benefit | (24 | ) | |||||||||||||||||||||
Add: Pension settlement charge | 6 | 6 | |||||||||||||||||||||
Add: Venezuela currency devaluation | 23 | ||||||||||||||||||||||
Total adjustments | 6 | 29 | (12 | ) | |||||||||||||||||||
Adjusted net income - Praxair, Inc. | $ | 477 | $ | 451 | $ | 1,392 | $ | 1,310 | $ | 462 | $ | 414 | |||||||||||
Reported percent change | 7 | % | 9 | % | |||||||||||||||||||
Adjusted percent change | 6 | % | 6 | % | |||||||||||||||||||
Adjusted Diluted Earnings Per Share | |||||||||||||||||||||||
Reported diluted earnings per share | $ | 1.62 | $ | 1.49 | $ | 4.70 | $ | 4.28 | $ | 1.59 | $ | 1.38 | |||||||||||
Add: Bond redemption | 0.04 | ||||||||||||||||||||||
Less: Income tax benefit | (0.08 | ) | |||||||||||||||||||||
Add: Pension settlement charge | 0.02 | 0.02 | |||||||||||||||||||||
Add: Venezuela currency devaluation | 0.08 | ||||||||||||||||||||||
Total adjustments | 0.02 | 0.10 | (0.04 | ) | |||||||||||||||||||
Adjusted diluted earnings per share | $ | 1.62 | $ | 1.51 | $ | 4.70 | $ | 4.38 | $ | 1.55 | $ | 1.38 | |||||||||||
Reported percent change | 8 | % | 10 | % | |||||||||||||||||||
Adjusted percent change | 7 | % | 7 | % | |||||||||||||||||||
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Percentage Change in Full - Year 2014 Diluted EPS Guidance
� | Low End | High End | |||||
2014 Diluted EPS guidance | $ | 6.23 | $ | 6.30 | |||
2013 Adjusted Diluted EPS (see 2013 Annual Report on Form 10-K) | $ | 5.93 | $ | 5.93 | |||
Percentage change from 2013 adjusted amounts | 5 | % | 6 | % | |||
New Accounting Standards
Refer to Note 1 of the condensed consolidated financial statements.
Forward-looking Statements
This document contains forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995. These statements are based on managements reasonable expectations and assumptions as of the date the statements are made but involve risks and uncertainties. These risks and uncertainties include, without limitation: the performance of stock markets generally; developments in worldwide and national economies and other international events and circumstances; changes in foreign currencies and in interest rates; the cost and availability of electric power, natural gas and other raw materials; the ability to achieve price increases to offset cost increases; catastrophic events including natural disasters, epidemics and acts of war and terrorism; the ability to attract, hire, and retain qualified personnel; the impact of changes in financial accounting standards; the impact of changes in pension plan liabilities; the impact of tax, environmental, healthcare and other legislation and government regulation in jurisdictions in which the company operates; the cost and outcomes of investigations, litigation and regulatory proceedings; continued timely development and market acceptance of new products and applications; the impact of competitive products and pricing; future financial and operating performance of major customers and industries served; the impact of information technology system failures, network disruptions and breaches in data security; and the effectiveness and speed of integrating new acquisitions into the business. These risks and uncertainties may cause actual future results or circumstances to differ materially from the projections or estimates contained in the forward-looking statements. The company assumes no obligation to update or provide revisions to any forward-looking statement in response to changing circumstances. The above listed risks and uncertainties are further described in Item�1A (Risk Factors) in this report which should be reviewed carefully. Please consider the companys forward-looking statements in light of those risks.
46
Item�3. Quantitative and Qualitative Disclosures About Market Risk
Refer to Item�7A. to Part II of Praxairs 2013 Annual Report on Form 10-K for discussion.
Item�4. Controls and Procedures
(a) | Based on an evaluation of the effectiveness of Praxairs disclosure controls and procedures, which was made under the supervision and with the participation of management, including Praxairs principal executive officer and principal financial officer, the principal executive officer and principal financial officer have each concluded that, as of the end of the quarterly period covered by this report, such disclosure controls and procedures are effective in ensuring that information required to be disclosed by Praxair in reports that it files under the Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commissions rules and forms, and accumulated and communicated to management including Praxairs principal executive officer and principal financial officer, to allow timely decisions regarding required disclosure. |
(b) | There were no changes in Praxairs internal control over financial reporting that occurred during the quarterly period covered by this report that have materially affected, or are reasonably likely to materially affect, Praxairs internal control over financial reporting. |
47
PART II - OTHER INFORMATION
Praxair, Inc. and Subsidiaries
Item�1. Legal Proceedings
See Note 12 to the condensed consolidated financial statements for a description of current legal proceedings.
Item�1A. Risk Factors
Due to the size and geographic reach of the companys operations, a wide range of factors, many of which are outside of the companys control, could materially affect the companys future operations and financial performance. Management believes the following risks may significantly impact the company:
General Economic Conditions - Weakening economic conditions in markets in which the company does business may adversely impact the companys financial results and/or cash flows.
Praxair serves approximately 25 diverse industries across more than 50 countries, which generally leads to financial stability through various business cycles. However, a broad decline in general economic or business conditions in the industries served by its customers could adversely affect the demand for Praxairs products and impair the ability of our customers to satisfy their obligations to the company, resulting in uncollected receivables and/or unanticipated contract terminations or project delays. In addition, many of the companys customers are in businesses that are cyclical in nature, such as the chemicals, electronics, metals and refining industries. Downturns in these industries may adversely impact the company during these cycles. Additionally, such conditions could impact the utilization of the companys manufacturing capacity which may require the company to recognize impairment losses on tangible assets such as property, plant and equipment as well as intangible assets such as intellectual property or goodwill.
Cost and Availability of Raw Materials and Energy - Increases in the cost of energy and raw materials and/or disruption in the supply of these materials could result in lost sales or reduced profitability.
Energy is the single largest cost item in the production and distribution of industrial gases. Most of Praxairs energy requirements are in the form of electricity, natural gas and diesel fuel for distribution. Praxair attempts to minimize the financial impact of variability in these costs through the management of customer contracts. Large customer contracts typically have escalation and pass-through clauses to recover energy and feedstock costs. Such attempts may not successfully mitigate cost variability which could negatively impact its financial condition or results of operations. The supply of energy has not been a significant issue in the geographic areas where it conducts business. However, regional energy conditions are unpredictable and may pose future risk.
For carbon dioxide, carbon monoxide, helium, hydrogen, specialty gases and surface technologies, raw materials are largely purchased from outside sources. Praxair has contracts or commitments for, or readily available sources of, most of these raw materials; however, their long-term availability and prices are subject to market conditions. A disruption in supply of such raw materials could impact the companys ability to meet contractual supply commitments.
International Events and Circumstances - The companys international operations are subject to the risks of doing business abroad and international events and circumstances may adversely impact its business, financial condition or results of operations.
Praxair has substantial international operations which are subject to risks including devaluations in currency exchange rates, transportation delays and interruptions, political and economic instability and disruptions, restrictions on the transfer of funds, the imposition of duties and tariffs, import and export controls, changes in governmental policies, labor unrest, possible nationalization and/or expropriation of assets, domestic and international tax laws and compliance with governmental regulations. These events could have an adverse effect on the international operations in the future by reducing the demand for its products, decreasing the prices at which it can sell its products, reducing the U.S. dollar value of revenue from international operations or otherwise having an adverse effect on its business. In particular, due to government actions related to business and currency regulations, there is considerable risk associated with operations in Venezuela (see Managements Discussion and Analysis - Currency). At September�30, 2014, Praxairs sales and net assets in Venezuela were less than 1% of Praxairs consolidated amounts. Also, the Company is monitoring developments regarding the collectability of government receivables from healthcare sales to public hospitals in Spain and Italy where economic conditions have been challenging and uncertain. Historically, collection of such government receivables has extended well beyond the contractual terms of sale; however,
48
payment has historically been received. At September�30, 2014 government receivables in Spain and Italy totaled $76 million ($82 million at December�31, 2013).
Global Financial Markets Conditions - Macroeconomic factors may impact the companys ability to obtain financing or increase the cost of obtaining financing which may adversely impact the companys financial results and/or cash flows.
Volatility and disruption in the U.S. and global credit and equity markets, from time to time, could make it more difficult for Praxair to obtain financing for its operations and/or could increase the cost of obtaining financing. In addition, the companys borrowing costs can be affected by short and long-term debt ratings assigned by independent rating agencies which are based, in significant part, on the companys performance as measured by certain criteria such as interest coverage and leverage ratios. A decrease in these debt ratings could increase the cost of borrowing or make it more difficult to obtain financing. While the impact of volatility in the global credit markets cannot be predicted with certainty, the company believes that it has sufficient operating flexibility, cash reserves, and funding sources to maintain adequate amounts of liquidity to meet its business needs around the world.
Competitor Actions - The inability to effectively compete could adversely impact results of operations.
Praxair operates within a highly competitive environment worldwide. Competition is based on price, product quality, delivery, reliability, technology and service to customers. Competitors behavior related to these areas could potentially have significant impacts on the companys financial results.
Governmental Regulations - The company is subject to a variety of United States and foreign government regulations. Changes in these regulations could have an adverse impact on the business, financial position and results of operations.
The company is subject to regulations in the following areas, among others:
" | Environmental protection; |
" | Domestic and international tax laws and currency controls; |
" | Safety; |
" | Securities laws (e.g., SEC and generally accepted accounting principles in the United States); |
" | Trade and import/ export restrictions; |
" | Antitrust matters; |
" | Global anti-bribery laws; and |
" | Healthcare reimbursement regulations. |
Changes in these or other regulatory areas may impact the companys profitability, may require the company to spend additional resources to comply with the regulations, or may restrict the companys ability to compete effectively in the marketplace. Noncompliance with such laws and regulations could result in penalties or sanctions that could have an adverse impact on the companys financial results. Environmental protection and healthcare reimbursement legislation are discussed further below.
Praxair is subject to various environmental and occupational health and safety laws and regulations, including those governing the discharge of pollutants into the air or water, the storage, handling and disposal of chemicals, hazardous substances and wastes, the remediation of contamination, the regulation of greenhouse gas emissions, and other potential climate change initiatives. Violations of these laws could result in substantial penalties, third party claims for property damage or personal injury, or sanctions. The company may also be subject to liability for the investigation and remediation of environmental contamination at properties that it owns or operates and at other properties where Praxair or its predecessors have operated or arranged for the disposal of hazardous wastes.
Although management does not believe that any such liabilities will have a material adverse impact on its financial position and results of operations, management cannot provide assurance that such costs will not increase in the future or will not become material. See the section captioned Managements Discussion and Analysis Environmental Matters in Item�7 of Praxairs 2013 Annual Report on Form 10-K.
Catastrophic Events - Catastrophic events could disrupt the operations of the company and/or its customers and suppliers and may have a significant adverse impact on the results of operations.
The occurrence of catastrophic events or natural disasters such as hurricanes, health epidemics, acts of war or terrorism, could disrupt or delay the companys ability to produce and distribute its products to customers and could potentially expose the
49
company to third-party liability claims. In addition, such events could impact the companys customers and suppliers resulting in temporary or long-term outages and/or the limitation of supply of energy and other raw materials used in normal business operations. These situations are outside the companys control and may have a significant adverse impact on the companys financial results.
Retaining Qualified Personnel - The inability to attract and retain qualified personnel may adversely impact the companys business.
If Praxair fails to attract, hire and retain qualified personnel, the company may not be able to develop, market or sell its products or successfully manage its business. Praxair is dependent upon its highly skilled, experienced and efficient workforce to be successful. Much of Praxairs competitive advantage is based on the expertise and experience of its key personnel regarding its marketing, technology, manufacturing and distribution infrastructure, systems and products. The inability to attract and hire qualified individuals or the loss of key employees in very skilled areas could have a negative effect on the companys financial results.
Technological Advances - If the company fails to keep pace with technological advances in the industry or if new technology initiatives do not become commercially accepted, customers may not continue to buy the companys products and results of operations could be adversely affected.
Praxairs research and development is directed toward developing new and improved methods for the production and distribution of industrial gases and the development of new markets and applications for the use of these gases. This results in the frequent introduction of new industrial gas applications and the development of new advanced air separation process technologies. The company also conducts research and development for its surface technologies to improve the quality and durability of coatings and the use of specialty powders for new applications and industries. As a result of these efforts, the company develops new and proprietary technologies and employs necessary measures to protect such technologies within the global geographies in which the company operates. These technologies help Praxair to create a competitive advantage and to provide a platform for the company to grow its business at greater percentages than the rate of industrial production growth in such geographies. If Praxairs research and development activities do not keep pace with competitors or if it does not create new technologies that benefit customers, future results of operations could be adversely affected.
Litigation and Governmental Investigations - The outcomes of litigation and governmental investigations may affect the companys financial results.
Praxair is subject to various lawsuits and governmental investigations arising out of the normal course of business that may result in adverse outcomes. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Adverse outcomes in some or all of the claims pending may result in significant monetary damages or injunctive relief that could adversely affect its ability to conduct business. While management currently believes that resolving all of these matters, individually or in the aggregate, will not have a material adverse impact on the companys financial position or liquidity, the litigation and other claims Praxair faces are subject to inherent uncertainties and managements view of these matters may change in the future. There exists the possibility of a material adverse impact on the companys results of operations for the period in which the effect of an unfavorable final outcome becomes probable and reasonably estimable.
Tax Liabilities - Potential tax liabilities could adversely impact the companys financial position and results of operations.
Praxair is subject to income and other taxes in both the United States and numerous foreign jurisdictions. The determination of the companys worldwide provision for income taxes and other tax liabilities requires judgment and is based on diverse legislative and regulatory structures that exist in the various jurisdictions where the company operates. Although management believes its estimates are reasonable, the ultimate tax outcome may differ from the amounts recorded in its financial statements and may materially affect the companys financial results for the period when such determination is made. See Notes 5 and 17 to the consolidated financial statements of Praxairs 2013 Annual Report on Form 10-K.
Pension Liabilities - Risks related to our pension benefit plans may adversely impact our results of operations and cash flows.
Pension benefits represent significant financial obligations that will be ultimately settled in the future with employees who meet eligibility requirements. Because of the uncertainties involved in estimating the timing and amount of future payments and asset returns, significant estimates are required to calculate pension expense and liabilities related to the companys plans. The company utilizes the services of independent actuaries, whose models are used to facilitate these calculations. Several key assumptions are used in the actuarial models to calculate pension expense and liability amounts recorded in the consolidated financial statements. In particular, significant changes in actual investment returns on pension assets, discount rates, or legislative or regulatory changes could impact future results of operations and required pension contributions. For information regarding the potential impacts regarding significant assumptions used to estimate pension expense, including discount
50
rates and the expected long-term rates of return on plan assets. See Critical Accounting Policies - Pension Benefits included in Managements Discussion and Analysis of Financial Condition and Results of Operations in Item�7 of Praxairs 2013 Annual Report on Form 10-K.
Operational Risks - Operational risks may adversely impact the companys business or results of operations.
Praxairs operating results are dependent on the continued operation of its production facilities and its ability to meet customer contract requirements and other needs. Insufficient or excess capacity threatens the companys ability to generate competitive profit margins and may expose the company to liabilities related to contract commitments. Operating results are also dependent on the companys ability to complete new construction projects on time, on budget and in accordance with performance requirements. Failure to do so may expose the business to loss of revenue, potential litigation and loss of business reputation.
Also inherent in the management of the companys production facilities and delivery systems, including storage, vehicle transportation and pipelines, are operational risks that require continuous training, oversight and control. Material operating failures at production, storage facilities or pipelines, including fire, toxic release and explosions, or the occurrence of vehicle transportation accidents could result in loss of life, damage to the environment, loss of production and/or extensive property damage, all of which may negatively impact the companys financial results.
Information Technology Systems The Company may be subject to information technology system ("IT") failures, network disruptions and breaches in data security.
Praxair relies on IT systems and networks for business and operational activities, and also stores and processes sensitive business and proprietary information in these systems and networks. These systems are susceptible to outages due to fire, floods, power loss, telecommunications failures, viruses, break-ins and similar events, or breaches of security. Management has taken steps to address these risks and concerns by implementing advanced security technologies, internal controls, network and data center resiliency and recovery processes. Despite these steps, however, operational failures and breaches of security from increasingly sophisticated cyber threats could lead to the loss or disclosure of confidential information, result in regulatory actions and have a material adverse impact on Praxair's operations, reputation and financial results.
Acquisitions and Joint Ventures - The inability to effectively integrate acquisitions or collaborate joint venture partners could adversely impact the companys financial position and results of operations.
Praxair has evaluated, and expects to continue to evaluate, a wide array of potential strategic acquisitions and joint ventures. Many of these acquisitions, if consummated, could be material to its financial condition and results of operations. In addition, the process of integrating an acquired company, business or group of assets may create unforeseen operating difficulties and expenditures. Although historically the company has been successful with its acquisition strategy and execution, the areas where the company may face risks include:
" | The need to implement or remediate controls, procedures and policies appropriate for a larger public company at companies that prior to the acquisition lacked these controls, procedures and policies; |
" | Diversion of management time and focus from operating existing business to acquisition integration challenges; |
" | Cultural challenges associated with integrating employees from the acquired company into the existing organization; |
" | The need to integrate each companys accounting, management information, human resource and other administrative systems to permit effective management; |
" | Difficulty with the assimilation of acquired operations and products; |
" | Failure to achieve targeted synergies; and |
" | Inability to retain key employees and business relationships of acquired companies. |
Foreign acquisitions and joint ventures involve unique risks in addition to those mentioned above, including those related to integration of operations across different cultures and languages, currency risks and the particular economic, political and regulatory risks associated with specific countries. Also, the anticipated benefit of the companys acquisitions may not materialize. Future acquisitions or dispositions could result in potentially dilutive issuances of equity securities, the incurrence of debt, contingent liabilities or amortization expenses, or impairments of goodwill, any of which could adversely impact the companys financial results.
51
Item�2. Unregistered Sales of Equity Securities and Use of Proceeds
Purchases of Equity Securities- Certain information regarding purchases made by or on behalf of the company or any affiliated purchaser (as defined in Rule 10b-18(a)(3) under the Securities Exchange Act of 1934, as amended) of its common stock during the quarter ended September�30, 2014 is provided below:
Period | Total�Number of Shares Purchased (Thousands) | Average Price�Paid Per Share | Total�Numbers�of�Shares Purchased as Part of Publicly Announced Program (1)� (Thousands) | Approximate Dollar Value of Shares that May Yet be Purchased Under�the�Program�(2) (Millions) | |||||||||
July 2014 | 258 | $ | 130.99 | 258 | $ | 1,421 | |||||||
August 2014 | 374 | $ | 129.24 | 374 | $ | 1,373 | |||||||
September 2014 | 265 | $ | 132.08 | 265 | $ | 1,338 | |||||||
Third Quarter 2014 | 897 | $ | 130.58 | 897 | $ | 1,338 | |||||||
�
(1) | On January 28, 2014, the company's board of directors approved the repurchase of an additional $1.5 billion of its common stock (2014 program) which could take place from time to time on the open market (which could include the use of 10b5-1 trading plans) or through negotiated transactions, subject to market and business conditions. The 2014 program does not have any stated expiration date. |
(2) | As of September 30, 2014, the Company purchased $162 million of its common stock pursuant to the 2014 program, leaving an additional $1,338 million remaining authorized. |
Item�3. Defaults Upon Senior Securities
None.
Item�4. Mine Safety Disclosures
Not applicable.
Item�5. Other Information
None.
Item�6. Exhibits
(a) | Exhibits | ||
* | 10.01 | Praxair Compensation Deferral Program amended and restated as of July 15, 2014 is filed herewith. | |
12.01 | �� | Computation of Ratio of Earnings to Fixed Charges. | |
31.01 | �� | Rule 13a-14(a) Certification | |
31.02 | �� | Rule 13a-14(a) Certification | |
32.01 | �� | Section 1350 Certification (such certifications are furnished for the information of the Commission and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act). | |
32.02 | �� | Section 1350 Certification (such certifications are furnished for the information of the Commission and shall not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act). | |
101.INS | �� | XBRL Instance Document | |
101.SCH | �� | XBRL Taxonomy Extension Schema | |
101.CAL | �� | XBRL Taxonomy Extension Calculation Linkbase | |
101.LAB | �� | XBRL Taxonomy Extension Label Linkbase | |
101.PRE | �� | XBRL Taxonomy Extension Presentation Linkbase | |
101.DEF | �� | XBRL Taxonomy Extension Definition Linkbase | |
52
SIGNATURE
Praxair, Inc. and Subsidiaries
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
�
� | � | PRAXAIR, INC. | � |
� | (Registrant) | ||
Date: October 29, 2014 | � | By: /s/ Elizabeth T. Hirsch | |
� | Elizabeth T. Hirsch | ||
� | Vice�President and Controller | ||
� | (On behalf of the Registrant | ||
� | and as Chief Accounting Officer) | ||
53
Praxair, Inc. and Subsidiaries
EXHIBIT 10.01
PRAXAIR COMPENSATION DEFERRAL PROGRAM
Amended and Restated as of July 15, 2014
1
TABLE OF CONTENTS
PAGE
SECTION 1:����PURPOSE���� ���������������������������� 3
SECTION 2:����DEFINITIONS������������������������ �������� 3
SECTION 3:����ADMINISTRATION���������������������������� 8
SECTION 4:����ELECTION TO PARTICIPATE���������������� 9
SECTION 5:����PAYMENTS TO PARTICIPANTS AND BENEFICIARIES������������ 11
SECTION 6:����BENEFICIARIES���������������������������� 16
SECTION 7:����EARNINGS ACCRUALS������������������������ 16
SECTION 8:����GENERAL PROVISIONS������������������������ ���� 17
2
PRAXAIR COMPENSATION DEFERRAL PROGRAM
SECTION 1:����PURPOSE
The purpose of the Praxair Compensation Deferral Program (the Plan ) is to provide: (i) Eligible Employees an opportunity to annually elect in advance to defer a portion or all of their Variable Compensation Awards granted pursuant to Praxairs Variable Compensation Plans; (ii) Designated Employees an opportunity to annually elect in advance to defer a portion or all of their base salaries; and (iii) Eligible Employees with Praxair contributions lost under the Savings Plan because of the limitations imposed under Code Section 401(a)(17). For Plan Years prior to January 1, 2006, all Eligible Employees were permitted to elect to defer all or a portion of their base salaries.
SECTION 2:����DEFINITIONS
2.1 Affiliate means any entity, whether or not incorporated, which is treated as a single employer with the Corporation under Code Sections 414(b), (c), (m) or (o), provided, however, that for purposes of determining whether a Participant has incurred a Separation from Service under the Plan, Code Sections 414(b) and (c) shall be applied using an at least 50 percent common ownership threshold in lieu of the at least 80 percent threshold otherwise applicable.
2.2 Beneficiary means the person, persons or estate entitled (as determined under Section 6) to receive payment under the Plan following a Participants death.
2.3 Board means the Corporations Board of Directors.
2.4 Change in Control means the occurrence of any one of the following events with respect to the Corporation:
(a) ����during a 12-month period, a majority of the individuals who constitute the Board are replaced by directors whose appointment or election is not endorsed by a majority of the members of the Board before the date of the appointment or election;
(b)����any one person, or more than one person acting as a group, becomes owner as defined in Section 318(a) of the Code (or has become owner during the 12-month period ending on the
3
date of the most recent acquisition by such person or group), of stock of the Corporation possessing 30 percent or more of the total voting power of the stock of the Corporation; provided, however, that the event described in this paragraph (b) shall not be deemed to be a Change in Control by virtue of any of the following acquisitions: (i) by the Corporation or any of its subsidiaries, (ii) by any employee benefit plan sponsored or maintained by the Corporation or any of its subsidiaries, or (iii) by any underwriter temporarily holding securities pursuant to an offering of such securities; or
(c)����any one person, or more than one person acting as a group, acquires (or has acquired during the 12-month period ending on the date of the most recent acquisition by such person or group) assets from the Corporation that have a total gross fair market value equal to or more than 80 percent of the total gross fair market value of all of the assets of the Corporation immediately prior to such acquisition(s); provided, however, that a transfer of assets by the Corporation is not treated as a Change in Control if the assets are transferred to: (i) a shareholder of the Corporation (immediately before the asset transfer) in exchange for or with respect to its stock; (ii) an entity, 50 percent or more of the total value or voting power of which is owned, directly or indirectly, by the Corporation; (iii) a person, or more than one person acting as a group, that owns, directly or indirectly, 50 percent or more of the total value or voting power of all outstanding stock of the Corporation; or (iv) an entity, at least 50 percent of the total value or voting power of which is owned, directly or indirectly, by a person described in the previous subsection (iii). For purposes of this paragraph, (1) gross fair market value means the value of the assets of the Corporation, or the value of the assets being disposed of, determined without regard to any liabilities associated with such assets, and (2) a persons status is determined immediately after the transfer of the assets; or
(d)����any one person, or more than one person acting as a group, becomes owner, as defined in Section 318(a) of the Code, of stock of the Corporation that, together with stock held by such person or group, constitutes more than 50 percent of the total fair market value or total voting power of stock of the Corporation; provided, however, that if any one person or more than one person acting as a
4
group, is considered to own more than 50 percent of the total fair market value or total voting power of stock of the Corporation, the acquisition of additional stock by the same person is not considered to cause a Change in Control. This paragraph applies only when there is a transfer of stock of the Corporation (or issuance of stock of the Corporation) and stock in the Corporation remains outstanding after the transaction.
For purposes of this definition:
(i) a person shall be as such term is defined in Section 3(a)(9) of the Securities Exchange Act of 1934 (the Exchange Act ) and as used in Sections 13(d)(3) and 14(d)(2) of the Exchange Act.
(ii) persons will be considered to be acting as a group if they are owners of a corporation that enters into a merger, consolidation, purchase or acquisition of stock, or similar transaction with the Corporation. If a person, including an entity, owns stock in both corporations that enter into a merger, consolidation, purchase or acquisition of stock, or similar transaction, such shareholder is considered to be acting as a group with other shareholders in the corporation prior to the transaction giving rise to the Change in Control and not with respect to the ownership interest in the other corporation. Persons will not be considered to be acting as a group solely because they purchase or own stock of the Corporation at the same time, or as a result of the same public offering.
2.5 Code means the Internal Revenue Code of 1986, as amended from time to time.
2.6 Committee means the Compensation and Management Development Committee of the Board, or any successor committee of the Board.
2.7 Corporation means Praxair, Inc., and any successor thereof by merger, consolidation or otherwise.
2.8 Date of Deferral means (i) with respect to the deferral of base salary or a Variable Compensation Award, the date on which such amount would have been paid by Praxair absent the Participants deferral election, and (ii) with respect to Praxair Contributions for a given Plan Year, the day
5
following the date that the Committee determines the common stock value for the Praxair Contribution deferral pursuant to the last sentence of Section 2.20.
2.9 Disability means a Participants total physical or mental inability to perform any work for compensation or profit in any occupation for which the Participant is reasonably qualified by reason of training, education or ability, and which inability is adjudged to be permanent, as determined by the Vice President-Human Resources or his or her designee.
2.10 Employee means an individual who is an employee of Praxair. An Employee shall be an Eligible Employee for any Plan Year for which he or she is on the U.S. payroll of Praxair in a position with a job level of 13 or higher (or the equivalent thereof) and is eligible to participate in a Variable Compensation Plan. An Employee shall be a Designated Employee for any Plan Year in which he or she in an Eligible Employee and is designated by the Vice President-Human Resources, in his or her sole discretion, as eligible to elect to defer base salary pursuant to Section 4.1(b).
2.11 Fixed Income Rate shall be determined for each Plan Year and shall be equal to the 1-year U.S. Treasury Bond rate in effect as of the end of the immediately preceding Plan Year, plus 50 basis points.
2.12 Participant means an Eligible Employee who: (i) previously elected to defer a portion or all of his or her base salary paid prior to January 1, 2006 to the Plan; (ii) is a Designated Employee and elects in advance under the Plan to defer all or a portion of his or her base salary for any Plan Year beginning after December 31, 2008; (iii) elects in advance under the Plan to defer a portion or all of any Variable Compensation Award that may be granted to him or her for a Plan Year, and who is in fact subsequently granted such an Award which is payable for said year on the Date of Deferral; or (iv) is credited with a Praxair Contribution pursuant to Section 4.2 of this Plan with respect to any Plan Year.
2.13 Plan means this Praxair Compensation Deferral Program.
2.14 Plan Year means the calendar year.
2.15 Praxair means the Corporation and its Affiliates.
6
2.16 Praxair Contribution means a credit on a Participants behalf described in Section 4.2.
2.17 Retirement means a Participants Separation from Service, after attaining age 50 and completing at least five years of service (as such service would be recognized under the Praxair Pension Plan if the Participant is, or had the Participant been, a participant in such Pension Plan).
2.18 Savings Plan means the Praxair Retirement Savings Plan.
2.19 Separation from Service means a Participants separation from service with Praxair, determined in accordance with Code Section 409A and the Treasury Regulations issued thereunder.
2.20 Stock Value Rate means the difference between the value of the Corporations common stock (a) as of the date amounts credited to the Plan are directed, by initial election or by reallocation, into the Stock Value Rate (or, in the case of initial deferrals of Praxair Contributions or of Variable Compensation Awards, the common stock value determined by the Committee in accordance with the last sentence of this Section), and (b) the date such amounts are paid out or withdrawn pursuant to Section 5. The Stock Value Rate shall include the value of any dividends paid on the Corporations common stock during the period for which the Stock Value Rate is being determined, as if such dividends were reinvested, when payable, in additional shares of the Corporations common stock purchased at the value of the Corporations common stock on the dividend payment date. Except as provided in the next sentence, the value of the Corporations common stock for purposes of this Section, shall mean the closing price of the stock on the New York Stock Exchange on the relevant date of determination. In January of each Plan Year, the Committee shall determine the common stock value to be used in valuing deferrals of Variable Compensation Awards and Praxair Contributions to be awarded with respect to the immediately preceding Plan Year.
2.21 Unforeseeable Emergency means a severe financial hardship to the Participant resulting from any of the following, to the extent that the emergency cannot be relieved through reimbursement or compensation from insurance or otherwise, by liquidation of the Participants assets (to the extent the
7
liquidation of such assets would not cause severe financial hardship), or by the cessation of deferrals under the Plan:
(a) ����an illness or accident of the Participant, the Participants spouse, the Participants beneficiary, or the Participants dependent (as defined in Code Section 152, without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B));
(b)����the loss of the Participants property due to casualty;
(c)����the need to pay medical expenses;
(a)the need to pay for the funeral expenses of the Participants spouse, a beneficiary, or a dependent (as defined in Code Section 152, without regard to Sections 152(b)(1), (b)(2), and (d)(1)(B)); or
(b)any other similar extraordinary and unforeseeable circumstance arising as a result of events beyond the control of the Participant.
Whether a Participant has an Unforeseen Emergency shall be determined by the Vice President-Human Resources or his or her designee, based upon the relevant facts and circumstances.
2.22 Variable Compensation Plan means the Praxair, Inc. Variable Compensation Plan, the Praxair, Inc. Mid-Management Variable Compensation Plan, and successors to such plans, all as amended from time to time.
2.23 Variable Compensation Award means a variable compensation award under a Variable Compensation Plan.
2.24 Vice President-Human Resources means the Corporations Vice President-Human Resources.
SECTION 3:����ADMINISTRATION
The Committee shall have full discretionary authority to interpret and construe the Plan and shall supervise the administration and interpretation of the Plan, establish administrative regulations to further the purpose of the Plan and take any other action necessary to the proper operation of the Plan. The
8
Committee may delegate to one or more of its members or any other person, the right to act on its behalf in any matter connected with the administration of the Plan and has delegated authority for the Plans day-to-day administration to the Corporations Human Resources Department. All decisions and acts of the Committee or its designee shall be final and binding upon all Participants, their beneficiaries and all other persons.
SECTION 4:����ELECTION TO PARTICIPATE
4.1Participant Deferral Elections.
(a)����Prior to the beginning of each Plan Year, Eligible Employees shall be informed of the opportunity to make an election to defer their Variable Compensation Awards under the Plan. An Eligible Employee electing to defer his or her Variable Compensation Award must make an election to do so during the election period ending not later than December 31st of the Plan Year immediately preceding the Plan Year for which such Variable Compensation Award relates, or such earlier date as established by the Vice President-Human Resources. An Eligible Employees election to defer a Variable Compensation Award shall be irrevocable with respect to the Plan Year and the Variable Compensation Plan for which it is made and shall become effective only on the applicable Date of Deferral and only if, on such date, the Eligible Employee receives a Variable Compensation Award (or would have received a Variable Compensation Award but for an election to defer under the Plan). An individual who first becomes an Eligible Employee at any time during a Plan Year is not permitted to make a deferral election with respect to any Variable Compensation Award earned for such Plan Year.
(b)����Prior to each Plan Year beginning after December 31, 2008, the Vice President-Human Resources, in his or her sole discretion, shall designate the Designated Employees for such Plan Year and such designation shall be in effect only for the Plan Year to which it applies. Each Designated Employee for such Plan Year shall be informed of the opportunity to make an election to defer under the Plan all or a portion of his or her base salary earned in such Plan Year. A Designated Employee electing to defer all or any portion of his or her base salary must make an election to do so during the election period
9
ending not later than December 31st of the Plan Year immediately preceding the Plan Year in which such base salary will be earned, or such earlier date as established by the Vice President-Human Resources. A Designated Employees election to defer base salary shall be irrevocable with respect to the Plan Year and shall be effective only for such Plan Year and only while such Designated Employee remains employed by the Corporation. An individual who first becomes an Eligible Employee at any time during a Plan Year is not permitted to make a deferral election with respect to any base salary earned for such Plan Year.
(c)����Any elections made pursuant to this Section 4.1 shall be made in accordance with such procedures as may be established from time to time by the Vice President-Human Resources.
1. | Praxair Contributions. |
(a)����Shortly after the end of each Plan Year, and without requiring any election to participate in this Plan, Praxair will credit each Eligible Employee, including an individual who first becomes an Eligible Employee during such Plan Year, with an amount equal to both the Praxair matching contribution rate, if any, applicable to such Employee under the Savings Plan (based on his or her actual Savings Plan contribution rate in effect as of the end of the Plan Year to which such credit relates) and/or the Praxair company contribution rate, if any, applicable to such Employee under the Savings Plan, in each case multiplied by that portion of such Employees compensation (as defined in the Savings Plan but without regard to either Code Section 401(a)(17) or any deferrals under this Plan) for the Plan Year to which such credit relates, which exceeds the maximum amount of compensation permitted to be taken into account for such Plan Year under Code Section 401(a)(17).
(b)����The Praxair Contributions shall be credited to each eligible Participant in arrears, as of the relevant Date of Deferral, provided that such Participant is then employed by Praxair and has not incurred a Separation from Service. Notwithstanding the foregoing, if the Participant has Separated from Service prior to the relevant Date of Deferral by reason of his or her death, Disability, Retirement, or termination by Praxair other than for cause, Praxair shall credit the Participant as of the relevant Date of Deferral with the appropriate Praxair Contributions even though such Participant is not employed by
10
Praxair on said Date of Deferral. Except as otherwise provided in Section 5.1(f), all Praxair Contributions credited on a Participants behalf shall become vested at the same time and to the same extent as comparable contributions made under the applicable Savings Plan. All unvested Praxair Contributions held on a Participants behalf as of his or her Separation from Service shall be immediately forfeited.
SECTION 5:����PAYMENTS TO PARTICIPANTS AND BENEFICIARIES
5.1����Time of Payment.
(a)����Subject to Sections 5.1(d) and (e): (i) a Participant who Retires shall receive payment of any vested Praxair Contributions credited on his or her behalf and adjusted for any earnings or losses under Section 7, during the January of the Plan Year immediately following his or her Retirement; and (ii) a Participant who Separates from Service prior to Retirement shall receive payment of any vested Praxair Contributions credited on his or her behalf and adjusted for any earnings or losses under Section 7, as soon as administratively possible following the date of his or her Separation from Service, but no later than 90 days after such date. Notwithstanding any provision in this Plan to the contrary, any vested Praxair Contributions credited on such Participants behalf with respect to the Plan Year in which he or she Retires or otherwise Separates from Service, shall be paid (along with any applicable earnings or losses on such amount as determined under Section 7) as soon as administratively practicable following Date of Deferral of such Praxair Contribution, but no later than 90 days after such Date of Deferral.
(b) ����Subject to Sections 5.1(c), (d) and (e): (i) a Participant who Retires shall receive (or commence, in the case of installments) payment of his or her previously deferred Variable Compensation Awards and/or base salary, and any earnings or losses credited with respect to such deferrals under Section 7, during the January of the Plan Year immediately following his or her Retirement; and (ii) a Participant who Separates from Service prior to Retirement shall receive (or commence, in the case of installments) payment of his or her previously deferred Variable Compensation Awards and/or base salary, and any earnings or losses credited with respect to such deferrals under Section 7, as soon as administratively possible following the date of his or her Separation from Service, but no
11
later than 90 days after such date. Participants shall be deemed to have elected to defer all such amounts until their Retirement/Separation from Service in accordance with this Section 5.1(b) unless a contrary election is made pursuant to Section 5.1(c) below.
(c)����Notwithstanding any provision in this Plan to the contrary, a Participant may, at the time of electing to defer a Variable Compensation Award and/or base salary, make an irrevocable election to receive payment of such deferred amounts during a specific future payment year other than the year including the applicable Date of Deferral. A Participant making such an election shall receive (or commence, in the case of installments) payment of any such amount in the January of the elected future payment year. A Participant may elect differing future payment dates for each years deferrals and may elect differing future payment dates with respect to deferrals of Variable Compensation Awards and base salary elected for the same Plan Year.
(d)����A Participant who has an Unforeseen Emergency may elect to receive payment of any or all of his or her vested Praxair Contributions, deferred base salary, deferred Variable Compensation Awards, and any earnings or losses credited to him or her pursuant to Section 7 of this Plan; provided that the Participant may not receive an amount greater than the amount necessary to meet the Unforeseen Emergency plus any amounts necessary to pay federal, state and local income taxes or penalties reasonably anticipated to result from a distribution made under this Section 5.1(d).
(e)����Notwithstanding any provision in this Plan to the contrary, and irrespective of any election made by the Participant under the Plan, if a Participant dies at any time before having received payment of his or her entire vested benefit under this Plan (including payment of remaining installments), payment of the Participants entire remaining vested benefit shall be made in full to the Participants Beneficiary in a single payment as soon as administratively possible following the date the Participants death, but no later than 90 days after such date, provided, however, that any vested Praxair Contributions credited on such Participants behalf with respect to the Plan Year of his or her death, shall be paid (along with any applicable earnings or losses on such amount as determined under Section 7) as soon as
12
administratively practicable following Date of Deferral of such Praxair Contribution, but no later than 90 days after such Date of Deferral.
(f)����Notwithstanding any provision in this Plan to the contrary, all Praxair Contributions shall fully vest and each Participant shall receive a lump sum payment of his or her entire benefit under this Plan (and any election to receive installment payments shall be disregarded) at such time as the Board determines that a Change in Control has occurred. Such payment shall be made in full within 45 days after the Change in Control.
(g)����Notwithstanding any provision in this Plan to the contrary, with respect to any Participant who, at the time of his or her Retirement or other Separation from Service, is a Specified Employee (as defined in Treasury Regulation Section 1.409A-1(i)), payment of benefits pursuant to Sections 5.1(a) or (b) shall commence no sooner than six (6) months after the date of such Participants Retirement or other Separation from Service to the extent required under Treasury Regulation Section 1.409A-3(i)(2).
5.2����Form of Payments.
(a)����Except as otherwise provided in this Section 5.2, all benefits payable under this Plan shall be paid in a single lump sum.
(b)����In the event that, prior to January 1, 2005, a valid election was received from a Participant to receive payment of all or any portion of his or her Plan benefit in annual installments over a designated period, payment of the portion of such Participants Plan benefit to which such prior election applies shall be made in accordance with such election.
(c) ����Effective as of July 15, 2014, a Participant may, at the time of electing to defer a Variable Compensation Award and/or base salary, make an irrevocable election to receive payment of such deferred amounts in substantially equal annual installments over a period of ten years. A Participant may elect differing future payment forms for each years deferrals and may elect differing future payment forms with respect to deferrals of Variable Compensation Awards and base salary elected for the same
13
Plan Year. Any installment payments elected will commence as of the applicable time set forth in Section 5.1 with subsequent annual installments payable in the calendar month including the anniversary of the date the first installment payment was made. With respect to any amounts subject to a deferral election made prior to January 1, 2015 (other than amounts covered by Section 5.2(b) hereof), an election to receive installment payments shall be subject to the Subsequent Election requirements under Section 5.5 hereof.
5.3����Payment in U.S. Dollars or Shares. All amounts which, at the time of payment, were accruing at the Fixed Income Rate, shall be paid in U.S. dollars and all amounts which, at the time of payment, were accruing under the Stock Value Rate, shall be paid in shares of the common stock of the Corporation.
5.4����Reduction of Payments: Share Withholding.
(a)����All payments under this Plan shall be reduced by any and all amounts that the Committee (or its designee) determines in its sole discretion are required to be withheld pursuant to applicable law.
(b)����In order to enable Praxair to meet any applicable federal, state or local tax withholding requirements, a Participant (or Beneficiary) who is receiving payment in shares of common stock of the Corporation, may elect to have Praxair withhold shares that would otherwise be delivered to such Participant (or Beneficiary), or may deliver to Praxair other shares of common stock of the Corporation owned by the Participant (or Beneficiary). The value of any such shares of common stock so withheld or delivered shall be the closing price of the common stock of the Corporation as reported in the New York Stock Exchange - Composite Transactions on the date of said payment.
5.5����Subsequent Elections - Additional Deferrals and Changes in Form of Payment. Notwithstanding Sections 5.1 and 5.2, a Participant who has made an election to defer a Variable Compensation Award and/or base salary in accordance with Section 4.1 hereof, may make a subsequent election to further defer payment of such amount and/or to change the form of payment from a single
14
lump sum to substantially equal annual installments over a period of ten years (collectively, a subsequent election ), provided such subsequent election is made in accordance with the following provisions:
(a)����The subsequent election must be made no later than 12 months prior to the date the Participant would otherwise have commenced receiving payments of the redeferred amounts had the subsequent election not been made;
(b)����With respect to the subsequent election applicable to any amount previously deferred until a specific future payment date in accordance with Section 5.1(c), the subsequent election must provide for the further deferral of the amount for a period of not less than five years from the date payment would otherwise have been made (or commenced, in the case of installments) had the subsequent deferral election not been made;
(c)����With respect to the subsequent election applicable to any amount previously deferred until Retirement or Separation from Service in accordance with Section 5.1(b), the subsequent election must provide for the further deferral of the amount for a period of not less than five years, nor more than ten years, from the date payment would otherwise have been made (or commenced, in the case of installments) had the subsequent election not been made;
(d)����For each original deferral election there may be only one subsequent election made pursuant to this Section 5.5; provided, however, that for purposes of this Section, a Participants election to defer base salary and a Variable Compensation Award payable for the same year shall be treated as two separate deferral elections and one subsequent election may be made with respect to each; and
(e) ����No such subsequent election shall apply to the payment of any Praxair Contributions.
5.6����Domestic Relations Orders. Notwithstanding any provision in this Plan to the contrary, the payment of all or any portion of a Participants Plan benefit may be made to an alternate payee upon or earlier than the time otherwise specified in this Section 5, to the extent necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B) or a successor Section).
15
SECTION 6:����BENEFICIARIES
A Participant may at any time and from time to time prior to death designate one or more Beneficiaries to receive any payments to be made following the Participants death. If no such designation is on file with Praxair at the time of a Participants death, the Participants Beneficiary shall be the beneficiary or beneficiaries named in the beneficiary designation most recently filed by the Participant under the Savings Plan. If the Participant has not effectively designated a beneficiary under the Savings Plan, or if no beneficiary so designated has survived the Participant, the Participants Beneficiary shall be the Participants surviving spouse, or, if no spouse has survived the Participant, the estate of the deceased Participant. If an individual Beneficiary cannot be located for a period of one year following the Participants death, despite mail notification to the Beneficiarys last known address, and if the Beneficiary has not made a written claim for benefits within such period to the Vice President-Human Resources, the Beneficiary shall be treated as having predeceased the Participant. The Vice President-Human Resources may require such proof of death and such evidence of the right of any person to receive all or part of the benefit of a deceased Participant as the Vice President-Human Resources may consider to be appropriate. The Vice President-Human Resources may rely upon any direction by the legal representatives of the estate of a deceased Participant, without liability to any other person.
SECTION 7:����EARNINGS ACCRUALS
7.1����General. All amounts deferred under the Plan, including elective deferrals and Praxair Contributions, shall be credited with earnings and losses from the applicable Date of Deferral through the date such amount is paid out, or withdrawn, pursuant to Section 5. Earnings under this Section 7.1 shall accrue at the rate elected in accordance with Section 7.2.
7.2����Earnings Accrual Rate.
(a)����Accrual Rates. Earnings accruing in accordance with Section 7.1 shall accrue at the Fixed Income Rate, the Stock Value Rate, or a combination of the two Rates.
16
(b)����Initial Election. Subject to Section 7.2(c), a Participant shall designate at the time of the election to defer base salary and/or Variable Compensation Awards under Section 4.1, which accrual rate or rates shall apply to each deferral, provided that such elections must be in 10% increments. Such election shall be effective as of the Date of Deferral. All Praxair Contributions shall at all times accrue earnings and losses at the Stock Value Rate.
(c)����Election Changes. A Participant may elect to change the accrual rate under this Section 7.2 with respect to any or all previously deferred base salary and/or Variable Compensation Awards under the Plan from the Fixed Income Rate to the Stock Value Rate. Any such election changes shall be effective as of January 1st of the Plan Year following the Plan Year in which the election change is received by Praxair in accordance with procedures established by the Vice President-Human Resources. No portion of a Participants Plan benefit accruing earnings and losses at the Stock Value Rate, including previously deferred base salary, Variable Compensation Awards and any Praxair Contributions, may be reallocated at any time from the Stock Value Rate to the Fixed Income Rate. Further, if a Participant has elected to receive any portion of his Plan benefit in installments, the Participant may not change the accrual rate applicable to such portion once installment payments of the portion have commenced.
SECTION 8:����GENERAL PROVISIONS
8.1����Prohibition of Assignment of Transfer. Except to the extent necessary to fulfill a domestic relations order (as defined in Code Section 414(p)(1)(B) or a successor Section), any assignment, hypothecation, pledge or transfer of a Participants or Beneficiarys right to receive payments under the Plan shall be null and void and shall be disregarded.
8.2����Plan Not To Be Funded. Praxair is not required to, and will not, for the purpose of funding the Plan, segregate any monies from its general funds, create any trusts, or make any special deposits, and the right of a Participant or Beneficiary to receive a payment under the Plan shall be no greater than the right of an unsecured general creditor of Praxair.
17
8.3����Effect of Participation. Neither selection as an Eligible Employee, nor an election to participate, nor participation, in the Plan, shall entitle an Eligible Employee to receive a Variable Compensation Award, or affect Praxairs right to discharge an Eligible Employee or a Participant.
8.4����Absence of Liability. No officer, director or employee of Praxair shall be personally liable for any act or omission to act, under the Plan, of any other person, or, except in circumstances involving bad faith, for such officers, directors or employees own act or omission to act.
8.5����Titles for Reference Only. The titles given herein to Sections and subsections are for reference only and are not to be used to interpret the provisions of the Plan.
8.6����Connecticut Law To Govern. All questions pertaining to the construction, regulation, validity and effect of the provisions of the Plan shall be determined in accordance with Connecticut law.
8.7����Amendment. The Board may amend the Plan at any time, but no amendment may be adopted which alters the payments due Participants or Beneficiaries, as of the date of the amendment, or the times at which payments are due, without the consent of each Participant affected by the amendment and of each Beneficiary (of a then deceased Participant) affected by the amendment. In addition, any amendment which does not significantly affect the amount of any past or future, benefits under the Plan may be authorized by the Vice President-Human Resources.
8.8����Plan Termination. The Board may terminate the Plan at any time. In the event the Plan is terminated, a Participants entire Plan benefit shall then be distributed to the Participant (or Beneficiary) so long as such termination and distribution meets (a), (b) or (c) below:
(a)����The termination and liquidation of the Plan takes place within 12 months of the Corporations corporate dissolution taxed under Code Section 331, or with the approval of a bankruptcy court pursuant to 11 U.S.C. � 503(b)(1)(A), and the deferred amounts are included in Participants gross incomes in the earliest of (x) the taxable year in which the amount is actually received, or (y) the latest of the following: (I) the calendar year in which the Plan termination and liquidation occurs; (II) the first
18
calendar year in which the amount is no longer subject to a substantial risk of forfeiture; or (III) the first calendar year in which the payment is administratively practicable;
(b)����The termination and liquidation of the Plan is pursuant to irrevocable action taken by the Corporation within 30 days before, or 12 months following, a Change in Control, provided that all other plans that allow Participants to make non-qualified deferrals that are aggregated with this Plan are terminated and liquidated such that all deferred compensation under the terminated plans and this Plan is paid out within 12 months of the date the Corporation takes all necessary action to terminate and liquidate the plans; or
(c)����The Corporations determination to terminate and liquidate the Plan does not occur proximate to a downturn in the financial health of the Corporation, the Corporation terminates and liquidates all plans that would be aggregated with this Plan if the Participants in the Plan had deferrals of compensation under the other plans, no payments in liquidation of the Plan are made within 12 months of the date the Corporation takes all necessary action to irrevocably terminate and liquidate the Plan (other than making payments that would be made regardless of whether the action to terminate and liquidate the Plan had occurred), and payments are made within 24 months of the date the Corporation takes all action to irrevocably terminate and liquidate the Plan.
8.9����409A Compliance. This Plan is intended to constitute a nonqualified deferred compensation plan within the meaning on Code Section 409A(d)(1), and is to be construed and administered in a manner consistent therewith.
PRAXAIR, INC.
By: /s/ Karen Keegans
Title: Vice President, Human Resources
Date: 7/15/14
19
RATIO OF EARNINGS TO FIXED CHARGES | |||||||||||||||||||
Praxair, Inc. and Subsidiaries | |||||||||||||||||||
Exhibit 12.01 | |||||||||||||||||||
Nine Months Ended September 30, | Year Ended December 31, | ||||||||||||||||||
(Dollar amounts in millions, except ratios) | 2014 | 2013 | 2012 | 2011 | 2010 | ||||||||||||||
Pre-tax income from continuing operations before adjustment for | |||||||||||||||||||
���noncontrolling interests in consolidated subsidiaries or income or | |||||||||||||||||||
���loss from equity investees | $ | 1,949 | $ | 2,447 | $ | 2,296 | $ | 2,323 | $ | 1,964 | |||||||||
������Capitalized interest | (28 | ) | (69 | ) | (70 | ) | (62 | ) | (62 | ) | |||||||||
������Depreciation of capitalized interest | 15 | 20 | 20 | 22 | 18 | ||||||||||||||
������Dividends from less than 50%-owned companies carried at equity | 5 | 10 | 7 | 6 | 9 | ||||||||||||||
Adjusted pre-tax income from continuing operations before adjustment | |||||||||||||||||||
���for noncontrolling interests in consolidated subsidiaries or income | 1,941 | 2,408 | 2,253 | 2,289 | 1,929 | ||||||||||||||
��� or�loss from equity investees | |||||||||||||||||||
Fixed charges | |||||||||||||||||||
���Interest on long-term and short-term debt | $ | 134 | $ | 178 | $ | 141 | $ | 145 | $ | 118 | |||||||||
���Capitalized interest | 28 | 69 | 70 | 62 | 62 | ||||||||||||||
���Rental expenses representative of an interest factor | 35 | 43 | 39 | 38 | 37 | ||||||||||||||
Total fixed charges | $ | 197 | $ | 290 | $ | 250 | $ | 245 | $ | 217 | |||||||||
Adjusted pre-tax income from continuing operations before adjustment | |||||||||||||||||||
��for noncontrolling interests in consolidated subsidiaries or income or | |||||||||||||||||||
��loss from equity investees plus total fixed charges | $ | 2,138 | $ | 2,698 | $ | 2,503 | $ | 2,534 | $ | 2,146 | |||||||||
RATIO OF EARNINGS TO FIXED CHARGES | 10.9 | 9.3 | 10.0 | 10.3 | 9.9 | ||||||||||||||
RULE 13a-14(a) CERTIFICATIONS
Praxair, Inc. and Subsidiaries
EXHIBIT 31.01
I, Stephen F. Angel, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Praxair, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing equivalent function): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
October 29, 2014 | By: /s/ Stephen F. Angel | ||
Stephen F. Angel | |||
Chairman, President | |||
Chief Executive Officer | |||
(principal executive officer) | |||
RULE 13a-14(a) CERTIFICATIONS
Praxair, Inc. and Subsidiaries
EXHIBIT 31.02
I, Matthew J. White, certify that:
1. | I have reviewed this quarterly report on Form 10-Q of Praxair, Inc.; |
2. | Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
4. | The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have: |
(a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; |
(b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
(c) | evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and |
(d) | disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and |
5. | The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrants auditors and the audit committee of the registrants board of directors (or persons performing equivalent function): |
(a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrants ability to record, process, summarize and report financial information; and |
(b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial reporting. |
October 29, 2014 | By: /s/ Matthew J. White | ||
Matthew J. White | |||
Senior Vice President and | |||
Chief Financial Officer | |||
(principal financial officer) | |||
SECTION 1350 CERTIFICATION
Praxair, Inc. and Subsidiaries
EXHIBIT 32.01
Pursuant to 18 U.S.C. � 1350, the undersigned officer of Praxair, Inc. (the Company ), hereby certifies that the Companys quarterly report on Form 10-Q for the quarter ended September 30, 2014 (the Report ) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
October 29, 2014 | By: /s/ Stephen F. Angel | ||
Stephen F. Angel | |||
Chairman, President | |||
Chief Executive Officer | |||
(principal executive officer) | |||
The foregoing certification is being furnished solely pursuant to 18 U.S.C. � 1350 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by 18 U.S.C. � 1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
SECTION 1350 CERTIFICATION
Praxair, Inc. and Subsidiaries
EXHIBIT 32.02
Pursuant to 18 U.S.C. � 1350, the undersigned officer of Praxair, Inc. (the Company ), hereby certifies that the Companys quarterly report on Form 10-Q for the quarter ended September 30, 2014 (the Report ) fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934 and that the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
October 29, 2014 | By: /s/ Matthew J. White | ||
Matthew J. White | |||
Senior Vice President and | |||
Chief Financial Officer | |||
(principal financial officer) | |||
The foregoing certification is being furnished solely pursuant to 18 U.S.C. � 1350 and is not being filed as part of the Report or as a separate disclosure document.
A signed original of this written statement required by 18 U.S.C. � 1350 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.
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