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| PX > SEC Filings for PX > Form 10-Q on 29-Oct-2008 | All Recent SEC Filings |
29-Oct-2008
Quarterly Report
Consolidated Results
The following table provides summary data for the quarters and nine-month
periods ended September 30, 2008 and 2007:
Quarter Ended September 30, Nine Months Ended September 30,
(Dollar amounts in millions) 2008 2007 Variance 2008 2007 Variance
Sales $ 2,852 $ 2,372 +20 % $ 8,393 $ 6,879 +22 %
Gross margin (a) $ 1,118 $ 978 +14 % $ 3,316 $ 2,815 +18 %
As a percent of sales 39.2 % 41.2 % 39.5 % 40.9 %
Selling, general and administrative $ 341 $ 294 +16 % $ 1,017 $ 876 +16 %
As a percent of sales 12.0 % 12.4 % 12.1 % 12.7 %
Depreciation and amortization $ 218 $ 196 +11 % $ 644 $ 567 +14 %
Other income (expenses) - net $ 9 $ (4 ) $ (14 ) $ 2
Operating profit $ 544 $ 460 +18 % $ 1,569 $ 1,302 +21 %
Interest expense - net $ 50 $ 44 +14 % $ 149 $ 123 +21 %
Effective tax rate 28 % 26 % 28 % 26 %
Net income $ 355 $ 305 +16 % $ 1,011 $ 861 +17 %
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(a) Gross margin excludes depreciation and amortization expense.
Quarter ended September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 3 % 6 %
Price 7 % 6 %
Acquisitions/divestitures 2 % 2 %
Currency 5 % 6 %
Natural gas 3 % 2 %
Total sales change 20 % 22 %
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Sales increased $480 million, or 20%, for the third quarter and $1,514 million, or 22%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Gulf Coast Hurricanes Ike and Gustav reduced sales by an estimated $30 million in the 2008 quarter and nine-month periods. Sales grew in all geographies driven by new business, plant start-ups and continued strong pricing trends. Volume growth of 3% and 6% for the quarter and year-to-date periods, respectively, reflects strong sales to the manufacturing, energy and metals end-markets, mitigated somewhat by shut-downs due to the hurricanes. Higher pricing contributed 7% and 6% 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 5% and 6% for the quarter and year-to-date periods, respectively. The net effect of acquisitions and divestitures contributed 2% to sales in the quarter and year-to-date. The contractual pass-through of higher natural gas costs to on-site hydrogen customers increased sales by $66 million, or 3%, for the quarter and $142 million, or 2%, for the year-to-date period, with a minimal impact on operating profit.
Gross margin in 2008 increased $140 million, or 14%, for the third quarter and $501 million, or 18%, for the nine months ended September 30, 2008 versus the respective 2007 periods. The decrease in the gross margin percentage for the quarter and year-to-date periods to 39.2% and 39.5%, 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 third quarter were $341 million, or 12.0% of sales, versus $294 million, or 12.4% of sales, for the respective 2007 period. SG&A expenses for the nine-month period were $1,017 million, or 12.1% of sales,
versus $876 million, or 12.7% 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 and the increase in sales due to the pass-through of higher natural gas costs to customers.
Depreciation and amortization expense increased $22 million, or 11%, for the third quarter and $77 million, or 14%, for the nine months ended September 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 $9-million benefit and $14-million expense for the quarter and nine months ended September 30, 2008, respectively. The 2008 quarter and nine-month periods included currency related net gains of $13 million and $6 million, respectively, which primarily consisted of net income hedge gains (see Note 5 to the condensed consolidated financial statements). The nine months ended September 30, 2008 included a pension settlement charge of $17 million (see Note 8 to the condensed consolidated financial statements).
Operating profit increased $84 million, or 18%, for the third quarter and $267 million, or 21%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Excluding the $17 million pension settlement charge in the nine month period, operating profit increased $284 million, or 22%. These results included an estimated $10 million of adverse effects from Hurricanes Ike and Gustav offset by net income hedge gains. The underlying increase in operating profit was principally driven by higher pricing, increased sales volumes and the continued impact of focused productivity initiatives.
Interest expense - net increased $6 million, or 14%, for the third quarter and $26 million, or 21%, for nine-months ended September 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 same periods in 2007. This increase is primarily due to earnings growth.
Net income increased $50 million, or 16%, for the third quarter and $150 million, or 17%, for the nine months ended September 30, 2008 versus the respective 2007 periods. The 2008 nine month period included the pension settlement charge of $17 million, $11 million after tax. Excluding the impact of this charge in the nine month period, net income increased $161 million, or 19%. 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.
The number of employees at September 30, 2008 was 27,957, a decrease of 35 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 September 30, Nine Months Ended September 30,
(Dollar amounts in millions) 2008 2007 Variance 2008 2007 Variance
SALES
North America $ 1,557 $ 1,306 +19 % $ 4,584 $ 3,804 +21 %
Europe 384 325 +18 % 1,180 991 +19 %
South America 527 419 +26 % 1,507 1,160 +30 %
Asia 239 190 +26 % 682 536 +27 %
Surface Technologies 145 132 +10 % 440 388 +13 %
$ 2,852 $ 2,372 +20 % $ 8,393 $ 6,879 +22 %
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OPERATING PROFIT North America $ 274 $ 244 +12 % $ 811 $ 692 +17 % Europe 96 78 +23 % 282 229 +23 % South America 111 84 +32 % 302 226 +34 % Asia 38 30 +27 % 115 87 +32 % Surface Technologies 25 24 + 4 % 76 68 +12 % Segment operating profit 544 460 +18 % 1,586 1,302 +22 % Pension settlement charge (a) - - (17 ) - Total operating profit $ 544 $ 460 $ 1,569 $ 1,302 |
(a) See Note 8 to the condensed consolidated financial statements.
North America
Quarter ended September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 1 % 4 %
Price 8 % 6 %
Acquisitions/divestitures 4 % 5 %
Currency 1 % 2 %
Natural gas 5 % 4 %
Total sales change 19 % 21 %
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Sales increased $251 million, or 19%, for the third quarter and $780 million, or 21%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Gulf Coast Hurricanes Ike and Gustav reduced sales by an estimated $30 million in the 2008 quarter and nine-month periods. Volume grew 1% and 4% for the quarter and year-to-date periods primarily due to higher sales to the energy, metals, chemicals and general manufacturing end-markets, mitigated somewhat by shut-downs due to the hurricanes. Higher pricing contributed 8% and 6% 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 in Mexico and Canada contributed 1% and 2% 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 $66 million, or 5%, for the quarter and $142 million, or 4%, for the year-to-date period, with minimal impact on operating profit.
Operating profit increased $30 million, or 12%, for the third quarter and increased $119 million, or 17%, for the nine months ended September 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 partially offset by an estimated $10 million of adverse effects from Hurricanes Ike and Gustav. 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 September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 2 % 2 %
Price 5 % 4 %
Divestitures (2 )% (1 )%
Currency 13 % 14 %
Total sales change 18 % 19 %
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Sales increased $59 million, or 18%, for the third quarter and $189 million, or 19%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Favorable currency contributed 13% and 14% to sales growth in the quarter and year-to-date periods, respectively. Volume growth of 2% in the quarter and year-to-date periods was due to growth in merchant and on-site gas sales in Spain, Germany and Italy. Realized price increases of 5% and 4% in the quarter and year-to-date periods, respectively, included the pass-through of higher energy 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 $18 million, or 23%, for the third quarter and $53 million, or 23%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Operating profit for the 2008 quarter and nine-month periods included a $9 million gain and a $6 million gain, respectively, related to net income hedges (see Note 5 to the condensed consolidated financial statements). Excluding the impact of net income hedge gains in the quarter and nine-month periods, operating profit increased $9 million, or 12%, and $47 million, or 21%, respectively. Underlying operating profit growth was driven by higher pricing and increased volumes. Currency appreciation also contributed to operating profit growth.
On April 1, 2008, Praxair completed the 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 September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 7 % 7 %
Price 7 % 7 %
Currency 12 % 16 %
Total sales change 26 % 30 %
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Sales increased $108 million, or 26%, for the third quarter and $347 million, or 30%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Excluding the impact of currency, sales increased 14% for the quarter and year-to-date period primarily due to strong volumes to the manufacturing, metals, food and beverage and healthcare end-markets and realized price increases.
Operating profit increased $27 million or 32% for the third quarter and $76 million, or 34%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Operating profit for the 2008 quarter included currency related net gains of $4 million which primarily consisted of net income hedge gains (see Note 5 to the condensed consolidated financial statements). Excluding the impact of the currency related net gains in the quarter operating profit increased $23 million, or 27%. The impact of currency related gains on the nine-month period was immaterial. 2008 operating profit also included amounts in both periods related to various contingencies in Brazil reflecting current developments which, on a net basis, were not significant. Underlying operating profit growth was due to higher pricing, increased volumes and the continued impact of cost-reduction programs. Currency appreciation also contributed to operating profit growth.
Asia
Quarter ended September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume 14 % 15 %
Price 11 % 9 %
Currency 1 % 3 %
Total sales change 26 % 27 %
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Sales increased $49 million, or 26%, for the third quarter and $146 million, or 27%, for the nine months ended September 30, 2008 versus the respective 2007 periods. Volume growth of 14% and 15% for the quarter and year-to-date periods, respectively, was due to new plant start-ups, strong merchant volumes in China, India and Korea and higher sales to the chemicals, electronics, and manufacturing end-markets. Price increases contributed 11% and 9% 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 1% and 3% to sales growth for the quarter and year-to-date periods, respectively.
Operating profit increased $8 million or 27%, for the third quarter and $28 million, or 32%, for the nine months ended September 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 September 30, Nine months ended September 30,
2008 vs. 2007 2008 vs. 2007
% Change % Change
Sales
Volume/Price 3 % 6 %
Currency 7 % 7 %
Total sales change 10 % 13 %
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Sales increased $13 million, or 10%, for the third quarter and $52 million, or 13%, for the nine months ended September 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 partially offset by lower sales to the aviation markets due to plane delays. Currency appreciation, primarily in Europe, contributed 7% to sales growth in the quarter and year-to-date periods.
Operating profit increased $1 million, or 4%, for the third quarter and $8 million, or 12%, for the nine months ended September 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 September 30, December 31,
Currency Sales (a) 2008 2007 2008 2007
European euro 16 % 0.65 0.75 0.68 0.69
Brazilian real 16 % 1.68 2.00 1.91 1.77
Canadian dollar 8 % 1.01 1.15 1.03 0.98
Mexican peso 5 % 10.48 10.90 10.79 10.87
Chinese RMB 2 % 7.01 7.68 6.81 7.31
Indian rupee 2 % 41.13 42.15 46.50 39.44
Korean won 2 % 995 934 1,161 941
Argentinean peso 1 % 3.11 3.11 3.14 3.15
Venezuelan bolivar (b) <1 % 2.15 2,150 2.15 2,150
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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:
Nine Months Ended
(Millions of dollars) September 30,
2008 2007
NET CASH PROVIDED BY (USED FOR):
OPERATING ACTIVITIES
Net income $ 1,011 $ 861
Depreciation and amortization 644 567
Accounts receivable (109 ) (222 )
Inventory (22 ) (55 )
Payables and accruals 36 133
Pension contributions (14 ) (16 )
Other - net (148 ) 103
Net cash provided by operating activities $ 1,398 $ 1,371
INVESTING ACTIVITIES
Capital expenditures $ (1,129 ) $ (974 )
Acquisitions (105 ) (349 )
Divestitures and asset sales 48 33
Net cash used for investing activities $ (1,186 ) $ (1,290 )
FINANCING ACTIVITIES
Debt increases (reductions) - net $ 820 $ 720
Issuances of common stock 176 245
Purchases of common stock (891 ) (816 )
Cash dividends (353 ) (287 )
Excess tax benefit on stock option exercises 52 54
Minority interest transactions and other (9 ) (12 )
Net cash used for financing activities $ (205 ) $ (96 )
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Cash Flow from Operations
Cash provided by operations of $1,398 million for the nine months ended September 30, 2008 increased $27 million versus 2007. The increase was due to net income growth and higher depreciation and amortization offset by tax payments in 2008 included in Other - net.
Investing
Net cash used for investing of $1,186 million for the nine months ended September 30, 2008 decreased $104 million versus 2007 primarily due to decreased acquisition spending. The 2007 nine-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 $155 million in capital expenditures reflecting continued investment in new on-site supply systems for customers.
Financing
The current global credit environment has not had, and is not expected to have, a significant adverse impact on liquidity. We continue to have access to the commercial paper markets, and expect to continue to generate strong operating cash flows. While the impact of continued volatility in the global credit markets cannot be predicted with certainty, we are confident that we have sufficient operating flexibility, cash reserves and funding sources to maintain adequate amounts of liquidity to meet our future business needs.
Through the nine months ended September 30, 2008 and continuing into October, actual returns for the company's U.S. pension plans are below the expected long-term rate of return of 8.25 percent due to the current adverse conditions in the global securities markets. Continued actual returns below this expected rate may impact the amount and timing of future contributions to these plans. The actual amounts will depend on actual returns and discount rates.
Cash used for financing activities of $205 million for the nine months ended September 30, 2008 increased $109 million versus 2007 primarily due to an increase in purchases of common stock, net of issuances, and higher dividends. Cash dividends of $353 million increased $66 million, or 23%, versus 2007 ($1.125 per share for 2008 compared to $0.90 per share for 2007).
At September 30, 2008, Praxair's total debt outstanding was $4,944, an increase of $752 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 . . .
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