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| PX > SEC Filings for PX > Form 10-Q on 23-Jul-2008 | All Recent SEC Filings |
23-Jul-2008
Quarterly Report
Consolidated Results
The following table provides summary data for the quarters and six-month periods
ended June 30, 2008 and 2007:
Quarter Ended June 30, Six Months Ended June 30,
(Dollar amounts in millions) 2008 2007 Variance 2008 2007 Variance
Sales $ 2,878 $ 2,332 +23 % $ 5,541 $ 4,507 +23 %
Gross margin(a) $ 1,130 $ 944 +20 % $ 2,198 $ 1,837 +20 %
As a percent of sales 39.3 % 40.5 % 39.7 % 40.8 %
Selling, general and administrative $ 341 $ 296 +15 % $ 676 $ 582 +16 %
As a percent of sales 11.8 % 12.7 % 12.2 % 12.9 %
Depreciation and amortization $ 216 $ 189 +14 % $ 426 $ 371 +15 %
Other income (expenses) - net $ (6 ) $ 4 $ (23 ) $ 6
Operating profit $ 543 $ 439 +24 % $ 1,025 $ 842 +22 %
Interest expense - net $ 52 $ 41 +27 % $ 99 $ 79 +25 %
Effective tax rate 28 % 26 % 28 % 26 %
Net income $ 349 $ 291 +20 % $ 656 $ 556 +18 %
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(a) Gross margin excludes depreciation and amortization expense.
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 6 % 6 %
Price 6 % 5 %
Acquisitions/divestitures 2 % 3 %
Currency 7 % 7 %
Natural gas 2 % 2 %
Total sales change 23 % 23 %
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Sales increased $546 million, or 23%, for the second quarter and $1,034 million, or 23%, for the six months ended June 30, 2008 versus the respective 2007 periods. Sales grew in all geographies driven by new business, plant start-ups and continued strong pricing trends. Volume growth of 6% for the quarter and year-to-date periods reflects strong sales to the manufacturing, energy and metals end-markets. Higher pricing contributed 6% and 5% to sales growth for the quarter and year-to-date periods, respectively, due to continued pricing actions and the pass-through of higher power costs and surcharges. The favorable impact of currency, primarily in Brazil, Europe and Canada, increased sales by 7% for the quarter and year-to-date periods. The net effect of acquisitions and divestitures contributed 2% to sales in the quarter and 3% to sales year-to-date. The contractual pass through of higher natural gas costs to on-site hydrogen customers increased sales by $56 million, or 2% for the quarter and $76 million, or 2% for the year-to-date period, with a minimal impact on operating profit.
Gross margin in 2008 increased to $186 million, or 20%, for the second quarter and $361 million, or 20%, for the six months ended June 30, 2008 versus the respective 2007 periods. The decrease in the gross margin percentage for the quarter and year-to-date periods to 39.3% and 39.7%, respectively, was due primarily to the contractual pass through of higher natural gas and power costs to customers.
Selling, general and administrative (SG&A) expenses for the second quarter were $341 million, or 11.8% of sales, versus $296 million, or 12.7% of sales, for the respective 2007 period. SG&A expenses for the six-month period were $676 million, or 12.2% of sales, versus $582 million, or 12.9% of sales, for the respective 2007 period. The decrease in SG&A as a percentage of sales was due to continued benefits from productivity initiatives.
Depreciation and amortization expense increased $27 million, or 14%, for the second quarter and $55 million, or 15%, for the six months ended June 30, 2008 versus the respective 2007 periods. The increase was principally due to new plant start-ups and currency effects.
Other income (expenses) - net was a $6-million expense and $23-million expense for the quarter and six months ended June 30, 2008, respectively. The six months ended June 30, 2008 includes a pension settlement charge of $17 million (see Note 8 to the condensed consolidated financial statements).
Operating profit increased $104 million, or 24%, for the second quarter and $183 million, or 22%, for the six months ended June 30, 2008 versus the respective 2007 periods. Excluding the $17 million pension settlement charge in the six month period, operating profit increased $200 million, or 24%. This increase was principally driven by higher pricing, increased sales volumes and the continued impact of focused productivity initiatives.
Interest expense - net increased $11 million, or 27%, for the second quarter and $20 million, or 25%, for six-months ended June 30, 2008 versus the respective periods in 2007 due to higher debt levels during 2008.
The effective tax rate was 28% for the quarter and year-to-date periods in 2008 versus 26% for the quarter and year-to-date periods in 2007. This increase is primarily due to earnings growth.
Net income increased $58 million, or 20%, for the second quarter and $100 million, or 18%, for the six months ended June 30, 2008 versus the respective 2007 periods. The 2008 six month period included the pension settlement charge of $17 million, $11 million after tax. Excluding the impact of this charge in the six month period, net income increased $111 million, or 20%. Operating profit growth was the primary driver of the net income growth partially offset by higher interest expense due to higher debt levels in 2008 and the increase in the effective tax rate from 26% in 2007 to 28% in 2008.
The number of employees at June 30, 2008 was 27,999, an increase of 7 employees from December 31, 2007.
Segment Discussion
The following summary of sales and operating profit by segment provides a basis
for the discussion that follows:
Quarter Ended June 30, Six Months Ended June 30,
(Dollar amounts in millions) 2008 2007 Variance 2008 2007 Variance
SALES
North America $ 1,573 $ 1,293 +22 % $ 3,027 $ 2,498 +21 %
Europe 406 336 +21 % 796 666 +20 %
South America 514 393 +31 % 980 741 +32 %
Asia 232 179 +30 % 443 346 +28 %
Surface Technologies 153 131 +17 % 295 256 +15 %
$ 2,878 $ 2,332 +23 % $ 5,541 $ 4,507 +23 %
OPERATING PROFIT
North America $ 275 $ 231 +19 % $ 537 $ 448 +20 %
Europe 99 79 +25 % 186 151 +23 %
South America 102 76 +34 % 191 142 +35 %
Asia 40 30 +33 % 77 57 +35 %
Surface Technologies 27 23 +17 % 51 44 +16 %
Segment operating profit 543 439 +24 % 1,042 842 +24 %
Pension settlement charge (a) - - (17 ) -
Total operating profit $ 543 $ 439 $ 1,025 $ 842
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(a) See Note 8 to the condensed consolidated financial statements.
North America
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 6 % 5 %
Price 6 % 5 %
Acquisitions/divestitures 4 % 5 %
Currency 2 % 3 %
Natural gas 4 % 3 %
Total sales change 22 % 21 %
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Sales increased $280 million, or 22%, for the second quarter and $529 million, or 21%, for the six months ended June 30, 2008 versus the respective 2007 periods. Volume grew 6% and 5% for the quarter and year-to-date periods primarily due to new business and higher sales to the energy, metals, chemicals and general manufacturing end-markets. Higher pricing contributed 6% and 5% to sales growth for the quarter and year-to-date periods, respectively, due to pricing actions to recover higher power and distribution costs. Acquisitions, primarily of packaged gas distributors in North America, contributed 4% and 5% to sales in the quarter and year-to-date periods, respectively. Currency appreciation, primarily in Canada, contributed 2% and 3% to sales in the quarter and year-to-date periods, respectively. The contractual pass through of higher natural gas costs to on-site hydrogen customers increased sales by $56 million or 4% for the quarter and $76 million or 3% for the year-to-date with minimal impact on operating profit.
Operating profit increased $44 million, or 19%, for the second quarter and $89 million, or 20%, for the six months ended June 30, 2008 versus the respective 2007 periods. Higher volumes, realized price increases and the continued focus on productivity initiatives were the primary drivers to the strong operating profit growth in the quarter and year-to-date periods. Operating profit grew at a slower pace than sales due to higher natural gas and power costs which are contractually passed through to customers.
On February 4, 2008, Praxair acquired Kirk Welding Supply, Inc., an independent packaged gas distributor with sales of $28 million in 2007 and operations in Kansas and Missouri.
Europe
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 2 % 3 %
Price 5 % 4 %
Divestitures (2 )% (1 )%
Currency 16 % 14 %
Total sales change 21 % 20 %
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Sales increased $70 million, or 21%, for the second quarter and $130 million, or 20%, for the six months ended June 30, 2008 versus the respective 2007 periods. Favorable currency contributed 16% and 14% to sales growth in the quarter and year-to-date periods, respectively. Volume growth of 2% and 3% in the quarter and year-to-date periods, respectively, was primarily due to growth in merchant and packaged gas sales in Italy and Germany. Realized price increases of 5% and 4% in the quarter and year-to-date periods, respectively, included the pass through of higher power and distribution costs. The divestiture of the industrial gas business in Israel decreased sales by 2% in the quarter and 1% in the year-to-date period.
Operating profit increased $20 million, or 25%, for the second quarter and $35 million, or 23%, for the six months ended June 30, 2008 versus the respective 2007 periods. Operating profit growth was driven by increased sales volumes and higher pricing. Currency appreciation also contributed to operating profit growth.
On April 1, 2008, Praxair completed the previously announced sale of its majority interest in Maxima Air Separation Center Ltd. with operations in Israel which did not have a material impact on the consolidated financial statements in 2008. Maxima contributed $27 million to sales in 2007.
South America
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 7 % 8 %
Price 8 % 7 %
Currency 16 % 17 %
Total sales change 31 % 32 %
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Sales increased $121 million, or 31%, for the second quarter and $239 million, or 32%, for the six months ended June 30, 2008 versus the respective 2007 periods. Excluding the impact of currency, sales increased 15% for the quarter and year-to-date periods primarily due to strong volumes to the manufacturing, metals and healthcare end-markets and realized price increases.
Operating profit increased $26 million or 34% for the second quarter and $49 million, or 35%, for the six months ended June 30, 2008 versus the respective 2007 periods. Higher pricing, increased volumes and the continued impact of cost-reduction programs continued to outpace cost increases, favorably contributing to operating profit growth. Currency appreciation also contributed to operating profit growth.
Asia
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 15 % 16 %
Price 12 % 8 %
Currency 3 % 4 %
Total sales change 30 % 28 %
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Sales increased $53 million, or 30%, for the second quarter and $97 million, or 28%, for the six months ended June 30, 2008 versus the respective 2007 periods. Volume growth of 15% and 16% for the quarter and year-to-date periods, respectively, was due to new plant start-ups and increased sales to the electronics, manufacturing and metals end-markets. Price increases contributed 12% and 8% to sales for the quarter and year-to-date periods, respectively. Higher pricing for rare and specialty gases due to strong demand and tight supply for certain products contributed to these increases. Favorable currency contributed 3% and 4% to sales growth for the quarter and year-to-date periods, respectively.
Operating profit increased $10 million or 33%, for the second quarter and $20 million, or 35%, for the six months ended June 30, 2008 versus the respective 2007 periods. Increased sales volumes and productivity initiatives were the primary drivers of operating profit growth.
Surface Technologies
Quarter ended June 30, Six months ended June 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume/Price 9 % 7 %
Currency 8 % 8 %
Total sales change 17 % 15 %
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Sales increased $22 million, or 17%, for the second quarter and $39 million, or 15%, for the six months ended June 30, 2008 versus the respective 2007 periods. Underlying growth was due to strong coatings volumes for industrial gas turbines and oilfield drilling parts and realized price increases. Currency appreciation, primarily in Europe, contributed 8% to sales growth in the quarter and year-to-date periods.
Operating profit increased $4 million, or 17%, for the second quarter and $7 million, or 16%, for the six months ended June 30, 2008 versus the respective 2007 periods. The increase was principally driven by volume growth as well as the favorable benefits of ongoing cost reduction actions and pricing actions to offset increasing raw material costs.
Currency
The results of Praxair's non-U.S. operations are translated to the company's reporting currency, the U.S. dollar, from the functional currencies used in the countries in which the company operates. 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 Praxair's results of operations in any given period.
To help understand the reported results, the following is a summary of the significant currencies underlying Praxair's 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):
Percent of Exchange rate for Exchange rate for
YTD 2008 Income Statement Balance Sheet
Consolidated Year-To-Date Average June 30, December 31,
Currency Sales (a) 2008 2007 2008 2007
European euro 17 % 0.66 0.75 0.64 0.69
Brazilian real 16 % 1.70 2.04 1.59 1.77
Canadian dollar 8 % 1.00 1.14 1.01 0.98
Mexican peso 5 % 10.65 10.99 10.30 10.87
Chinese RMB 2 % 7.10 7.74 6.86 7.31
Indian rupee 2 % 40.23 42.83 42.80 39.44
Korean won 2 % 973 935 1,038 941
Argentinean peso 1 % 3.14 3.09 3.03 3.15
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(a) Certain surface technologies segment sales are included in European and Brazilian sales.
(b) The Central Bank of Venezuela issued a financial regulation dividing the Venezuelan bolivar by 1,000 effective January 1, 2008.
Liquidity, Capital Resources and Other Financial Data
The following selected cash flow information provides a basis for the discussion
that follows:
Six Months Ended
(Millions of dollars) June 30,
2008 2007
NET CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income $ 656 $ 556
Depreciation and amortization 426 371
Accounts receivable (269 ) (163 )
Inventory (33 ) (37 )
Payables and accruals 95 17
Pension contributions (13 ) (14 )
Other - net (94 ) 49
Net cash provided by operating activities $ 768 $ 779
INVESTING ACTIVITIES
Capital expenditures $ (724 ) $ (614 )
Acquisitions (70 ) (327 )
Divestitures and asset sales 46 21
Net cash used for investing activities $ (748 ) $ (920 )
FINANCING ACTIVITIES
Debt increases (reductions) - net $ 356 $ 473
Issuances of common stock 154 167
Purchases of common stock (332 ) (353 )
Cash dividends (236 ) (192 )
Excess tax benefit on stock option exercises 44 34
Minority interest transactions and other - (4 )
Net cash provided by (used for) financing activities $ (14 ) $ 125
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Cash Flow from Operations
Cash provided by operations of $768 million for the six months ended June 30, 2008 decreased $11 million versus 2007. Strong net income growth was offset by higher working capital related to sales growth and tax payments.
Investing
Net cash used for investing of $748 million for the six months ended June 30, 2008 decreased $172 million versus 2007 primarily due to decreased acquisition spending. The 2007 six-month period included the acquisitions of an industrial gas business in Mexico and an independent packaged gas distributor in the U.S. This decrease was partially offset by an increase of $110 million in capital expenditures reflecting continued investment in new on-site supply systems for customers.
Financing
Cash used for financing activities was $14 million in 2008 versus cash provided by financing activities of $125 million in 2007. The decrease reflects lower debt issuances due to reduced acquisition spending, partially offset by higher dividends. Cash dividends of $236 million increased $44 million from the year ago period. For the six months ended June 30, 2008, cash dividends were $0.75 per share compared to $0.60 per share for 2007, an increase of 25%.
At June 30, 2008, Praxair's total debt outstanding was $4,596, an increase of $404 million from December 31, 2007. On March 3, 2008 and on June 16, 2008, Praxair repaid $250 million of 6.50% notes and $300 million of 2.75% notes that were due, respectively. On March 7, 2008, Praxair issued $500 million of 4.625% notes due 2015. The proceeds were used to refinance existing debt, fund share repurchases and for general corporate purposes.
On July 23, 2008, the company announced that the company's board of directors approved a new $1 billion share repurchase program authorizing the company to repurchase shares from time to time on the open market or through negotiated transactions, subject to market and business conditions. Share repurchases under this program are expected to be completed over the next two years and will be financed by available cash and debt. This program is in addition to the $1 billion share repurchase program in effect since July 2007. As of June 30, 2008 $898 million of share repurchases had been completed under the 2007 program.
Legal Proceedings
See Note 9 to the condensed consolidated financial statements for a description of current legal proceedings.
Other Financial Data
Definitions of the following non-GAAP measures may not be comparable to similar definitions used by other companies. Praxair believes that its debt-to-capital ratio is appropriate for measuring its financial leverage. The company believes that its after-tax return on invested capital ratio is an appropriate measure for judging performance as it reflects the approximate after-tax profit earned as a percentage of investments by all parties in the business (debt, minority interests and shareholders' equity). The company believes that its return on equity is an appropriate measure for judging the performance for shareholders.
June 30, December 31,
(Dollar amounts in millions) 2008 2007
TOTAL CAPITAL
Debt $ 4,596 $ 4,192
Minority interests 317 321
Shareholders' equity 5,671 5,142
$ 10,584 $ 9,655
DEBT-TO-CAPITAL RATIO 43.4 % 43.4 %
Quarter Ended Six Months Ended
June 30, June 30,
2008 2007 2008 2007
AFTER-TAX RETURN ON CAPITAL (ROC)
Reported operating profit $ 543 $ 439 $ 1,025 $ 842
Add: Pension settlement charge* - - 17 -
Adjusted operating profit $ 543 $ 439 $ 1,042 $ 842
Less: reported taxes (137 ) (103 ) (259 ) (198 )
Less: tax benefit on pension settlement charge* - - (6 ) -
Less: tax benefit on interest expense(a) (15 ) (11 ) (28 ) (21 )
Add: equity income 8 5 17 9
Net operating profit after-tax (NOPAT) $ 399 $ 330 $ 766 $ 632
Beginning capital $ 10,127 $ 8,433 $ 9,655 $ 7,943
Ending capital $ 10,584 $ 8,784 $ 10,584 $ 8,784
Average capital $ 10,356 $ 8,609 $ 10,120 $ 8,364
ROC % 3.9 % 3.8 % 7.6 % 7.6 %
ROC % (annualized) 15.4 % 15.3 % 15.1 % 15.1 %
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