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PX > SEC Filings for PX > Form 10-K on 25-Feb-2014All Recent SEC Filings

Show all filings for PRAXAIR INC

Form 10-K for PRAXAIR INC


25-Feb-2014

Annual Report


ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion of the company's financial condition and results of operations should be read together with its consolidated financial statements and notes to the consolidated financial statements included in Item 8 of this Form 10-K.
                                                       Page
Business Overview                                       16
Executive Summary - Financial Results & Outlook         17
Consolidated Results and Other Information              18
Segment Discussion                                      24
Liquidity, Capital Resources and Other Financial Data   35
Contractual Obligations                                 39
Off-Balance Sheet Arrangements                          39
Critical Accounting Policies                            40
New Accounting Standards                                42
Fair Value Measurements                                 42
Non-GAAP Financial Measures                             42
Forward-Looking Statements                              47

BUSINESS OVERVIEW
Praxair is the largest industrial gases supplier in North and South America, is rapidly growing in Asia, and has strong, well-established businesses in Europe. The company's primary products are oxygen, hydrogen, nitrogen, argon, carbon dioxide, helium, electronic gases and a wide range of specialty gases. Praxair Surface Technologies supplies high-performance coatings that protect metal parts from wear, corrosion and high heat. Praxair's industrial gas operations are managed on a geographical basis and in 2013, 95% of sales were generated in four geographic segments (North America, Europe, South America, and Asia). The surface technologies segment generated the remaining 5% of sales.
Praxair serves approximately 25 industries as diverse as healthcare, petroleum refining, computer-chip manufacturing, beverage carbonation, fiber-optics, steel making, aerospace, chemicals and water treatment. The diversity of end markets creates financial stability for Praxair in varied business cycles. Praxair generates most of its revenues and earnings through the following 11 core geographies where the company has its strongest market positions and where distribution and production operations allow the company to deliver the highest level of service to its customers at the lowest cost.

North America   South America       Europe          Asia
United States      Brazil            Spain         China
   Canada                            Italy         India
   Mexico                       Germany/Benelux    Korea
                                                  Thailand

Praxair manufactures and distributes its products through networks of hundreds of production plants, pipeline complexes, distribution centers and delivery vehicles. Major pipeline complexes are located in the United States, Brazil, Spain and Germany. These networks are a competitive advantage, providing the foundation of reliable product supply to the company's customer base. The majority of Praxair's business is conducted through long-term contracts which provide stability in cash flow and the ability to pass through changes in energy and feedstock costs to customers. The company has significant growth opportunities in diverse markets including: hydrogen for refining; oxygen for gasification and oxy-fuel applications; and nitrogen and carbon dioxide for oil and gas production.


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EXECUTIVE SUMMARY - FINANCIAL RESULTS & OUTLOOK
2013 Year in review
Praxair delivered strong results for the full year of 2013. Sales growth came primarily from strong volume growth in North America, South America and Asia and higher overall pricing. This was partially offset by the impact of negative currency translation, primarily in South America due to a weaker Brazilian Real versus the U.S. dollar. Volume growth versus 2012 came from project start-ups primarily in North America and Asia, stronger underlying customer demand in most major geographies due to improved macro-economic conditions as compared to 2012, and several acquisitions completed during the year. Operating profit and earnings per share both grew from the prior year, and the company generated record cash flow from operations.
Sales of $11,925 million were 6% above 2012 sales of $11,224 million. Excluding negative currency impacts, sales grew 8% primarily due to organic sales growth, acquisitions and new project start-ups.

Reported operating profit of $2,625 million increased 8% from $2,437 million in 2012. Adjusted operating profit of $2,657 million increased 6% from 2012, from higher volumes, pricing, and acquisitions, partially offset by negative currency effects.*

Reported net income - Praxair, Inc. of $1,755 million and diluted earnings per share of $5.87 increased from $1,692 million and $5.61, respectively, in 2012. Adjusted net income - Praxair, Inc. of $1,772 million and adjusted diluted earnings per share of $5.93 increased 5% and 6% above 2012, respectively. Earnings per share grew faster than net income due to lower shares outstanding as a result of share repurchases during the year.*

Cash flow from operations was a record $2,917 million, 6% above 2012.

Capital expenditures were $2,020 million, primarily for the construction of new on-site production plants under long-term contract with customers around the world. Acquisition expenditures of $1,323 million primarily related to the acquisition of NuCO2 Inc ("NuCO2") in the United States.

2014 Outlook
Sales are forecasted to be in the range of $12.3 to $12.8 billion.

Diluted earnings per share are forecasted to be in the range of $6.25 to $6.55, an increase of 5% to 10% from 2013 adjusted amounts.

Effective tax rate of about 28%.

Capital expenditures in the range of $1.8 to $2.0 billion.

The company's 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 an indicator of future sales growth. At December 31, 2013, Praxair's backlog of 32 large projects under construction was $2.2 billion. This represents the total estimated capital cost of large plants under construction. North America and Asia each represent about one-third of the backlog. The remaining backlog resides in Europe, primarily in Russia, and in South America.

* A reconciliation of the Adjusted amounts can be found in the "Non-GAAP Financial Measures" section on this MD&A. See Notes 2, 5 and 11 to the consolidated financial statements. The above guidance should be read in conjunction with the section entitled "Forward-Looking Statements." Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via earnings releases and investor teleconferences. These materials are available on the company's website, www.praxair.com/investors but are not incorporated herein.


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CONSOLIDATED RESULTS AND OTHER INFORMATION
The following table provides selected data for 2013, 2012, and 2011:
                                                                                       Variance
(Dollar amounts in millions,
except per share data)
Year Ended December 31,          2013           2012           2011        2013 vs. 2012      2012 vs. 2011
Reported Amounts:
Sales                        $   11,925     $   11,224     $   11,252            6  %               -  %
Gross margin (a)             $    5,181     $    4,828     $    4,794            7  %               1  %
As a percent of sales              43.4 %         43.0 %         42.6 %
Selling, general and
administrative               $    1,349     $    1,270     $    1,239            6  %               3  %
As a percent of sales              11.3 %         11.3 %         11.0 %
Depreciation and
amortization                 $    1,109     $    1,001     $    1,003           11  %               -  %
Venezuela currency
devaluation and other
charges - net (b)            $       32     $       65     $        1
Other income (expenses) -
net                          $       32     $       43     $        7
Operating profit             $    2,625     $    2,437     $    2,468            8  %              (1 )%
As a percent of sales              22.0 %         21.7 %         21.9 %
Interest expense - net       $      178     $      141     $      145           26  %              (3 )%
Effective tax rate                 26.5 %         25.5 %         27.6 %
Income from equity
investments                  $       38     $       34     $       40           12  %             (15 )%
Noncontrolling interests     $      (81 )   $      (52 )   $      (50 )         56  %               4  %
Net income - Praxair, Inc.   $    1,755     $    1,692     $    1,672            4  %               1  %
Diluted earnings per share   $     5.87     $     5.61     $     5.45            5  %               3  %
Diluted shares outstanding      298,965        301,845        306,722           (1 )%              (2 )%
Number of employees              27,560         26,539         26,184
Adjusted Amounts (c):
Operating profit             $    2,657     $    2,502     $    2,469            6  %               1  %
As a percent of sales              22.3 %         22.3 %         21.9 %
Interest expense - net       $      160     $      141     $      145           13  %              (3 )%
Effective tax rate                 28.0 %         28.0 %         27.8 %
Noncontrolling interests     $      (65 )   $      (54 )   $      (51 )
Net income - Praxair, Inc.   $    1,772     $    1,681     $    1,666            5  %               1  %
Diluted earnings per share   $     5.93     $     5.57     $     5.43            6  %               3  %



(a) Gross margin excludes depreciation and amortization expense.

(b) See Note 2 to the consolidated financial statements.

(c) Adjusted amounts are non-GAAP measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Financial Measures" section of this MD&A. See Notes 2, 5 and 11 to the consolidated financial statements.


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Results of Operations
The following table provides a summary of changes in consolidated sales and adjusted operating profit:

                                              2013 vs. 2012                         2012 vs. 2011
                                                 % Change                             % Change
                                      Sales         Operating Profit       Sales          Operating Profit
Factors Contributing to Changes
Volume                                   3  %               1  %              2  %                1  %
Price                                    2  %               8  %              2  %                7  %
Cost pass-through                        -  %               -  %             (1 )%                -  %
Currency                                (2 )%              (2 )%             (4 )%               (5 )%
Acquisitions/Divestitures                3  %               3  %              1  %                1  %
Other                                    -  %              (2 )%              -  %               (5 )%
Reported                                 6  %               8  %              -  %               (1 )%
Venezuela currency devaluation
and other charges, net                   -  %              (2 )%              -                   2  %
Adjusted                                 6  %               6  %              -  %                1  %

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

                                                         Organic Sales*
                            % of Sales                      % Change
                       2013    2012    2011     2013 vs. 2012      2012 vs. 2011
Sales by End Markets
Manufacturing           24 %    25 %    24 %           2 %                5  %
Metals                  17 %    18 %    18 %           7 %                6  %
Energy                  13 %    11 %    11 %          10 %               10  %
Chemicals               10 %    10 %    10 %           9 %               (1 )%
Electronics              8 %     8 %     9 %           1 %               (5 )%
Healthcare               8 %     8 %     8 %           4 %                6  %
Food & Beverage          8 %     6 %     6 %           1 %                1  %
Aerospace                3 %     3 %     3 %           4 %               11  %
Other                    9 %    11 %    11 %           1 %               (6 )%
                       100 %   100 %   100 %

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

                                      % of Sales
                                 2013    2012    2011
Sales by Distribution Method**
On-Site                           27 %    26 %    26 %
Merchant                          34 %    33 %    34 %
Packaged Gas                      30 %    31 %    30 %
Other                              9 %    10 %    10 %
                                 100 %   100 %   100 %

** Prior years' amounts have been reclassified to conform to current year's presentation.


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2013 Compared With 2012

Sales increased 6% to $11,925 million during 2013 compared to $11,224 million in 2012. Higher volumes, primarily in North and South America and in Asia, higher overall pricing and growth from acquisitions were partially offset by negative currency translation impacts, primarily resulting from the strengthening of the U.S. dollar against the Brazilian Real. Cost pass-through had minimal impact due to lower precious metal prices offsetting energy cost inflation.
Gross margin increased $353 million, or 7%, versus 2012. The increase was due to higher volumes and higher pricing, resulting in an increase in the gross margin percentage to 43.4%, versus 43.0% in the prior year.
Selling, general and administrative ("SG&A") expenses in 2013 were $1,349 million, or 11.3% of sales, versus $1,270 million, or 11.3% of sales, for 2012. The increase in SG&A expense of $79 million was primarily due to the impact of acquisitions ($56 million). In addition, pension expense increased $26 million due to an increase in the amortization of net actuarial losses, primarily attributable to lower discount rates. Currency effects reduced SG&A expense by $14 million.
Depreciation and amortization expense increased $108 million versus 2012. This increase was primarily due to an increase of $42 million from acquisitions and approximately $70 million from plant start-ups and asset additions, partially offset by currency effects of $13 million.
Other income (expenses) - net in 2013 was a $32 million benefit versus a $43 million benefit in 2012. Other income was higher in 2012 primarily due to a larger favorable litigation settlements in South America. See Note 7 to the consolidated financial statements for a summary of the major components of Other income (expenses) - net.
Reported operating profit of $2,625 million in 2013 was $188 million, or 8% higher than reported operating profit of $2,437 million in 2012. As a percentage of sales, reported operating profit increased to 22.0% in 2013 from 21.7% in 2012. This is primarily due to the attainment of price increases in most geographies. The 2013 period includes a $23 million charge related to the Venezuela currency devaluation and $9 million charge related to a pension settlement. The 2012 period also included a pension settlement charge of $9 million as well as a $56 million charge for cost reduction programs. Adjusted operating profit of $2,657 million in 2013 was $155 million, or 6% higher than adjusted operating profit of $2,502 million in 2012. A discussion of operating profit by segment is included in the segment discussion that follows. Reported interest expense - net in 2013 increased $37 million, versus 2012. The increase included an $18 million charge recognized upon the early redemption of the $400 million 5.25% Notes due in 2014. Excluding this charge, adjusted interest expense increased $19 million. Higher overall debt levels to fund capital expenditures and acquisitions increased interest expense by about $45 million, and reduced benefits from the amortization of interest rate swap gains increased interest expense by $11 million versus 2012. Lower interest rates reduced interest expense by approximately $37 million dollars. See Note 7 to the consolidated financial statements for further information relating to interest expense.
The effective tax rate for 2013 was 26.5% versus 25.5% in 2012. 2013 included a $40 million benefit as a result of a realignment of Praxair's Italian legal structure, and 2012 included a $55 million income tax benefit related to the loss on a liquidated subsidiary (See Note 5 to the consolidated financial statements). The adjusted effective tax rate for both 2012 and 2013 was 28.0%. Praxair's significant equity investments are in the United States, China, Italy, and the Middle East. Equity income increased $4 million in 2013 related primarily to higher equity income in China.
At December 31, 2013, reported noncontrolling interests consisted primarily of noncontrolling shareholders' investments in Asia (primarily in China and India), Europe (primarily in Italy and Scandinavia), and North America (primarily within the U.S. packaged gas business). The $29 million increase in reported noncontrolling interests in 2013 was primarily due to the minority shareholder's portion of the income tax benefit in Italy related to the company's legal realignment. Adjusted noncontrolling interest in 2013 was $65 million compared to $54 million in 2012. This increase is primarily driven by improved performance by the U.S. packed gas and Italian investments.
Reported net income - Praxair, Inc. in 2013 was $1,755 million, or $63 million above net income - Praxair, Inc. of $1,692 million in 2012. Adjusted net income
- Praxair, Inc. of $1,772 million in 2013 was $91 million, or 5% higher than adjusted net income - Praxair, Inc. of $1,681 million in 2012. This increase was primarily due to higher adjusted operating profit partially offset by higher interest expense and increased income tax expense. Reported diluted earnings per share ("EPS") of $5.87 in 2013 increased $0.26 per diluted share, or 5% from $5.61 in 2012. Adjusted diluted EPS of $5.93 in 2013 increased $0.36 per diluted share, or 6%, from adjusted diluted EPS of $5.57 in 2012. The increase in adjusted diluted EPS was primarily due to higher net income - Praxair, Inc. and a 1.0% decrease in the number of diluted shares outstanding as a result of the company's net repurchases of common stock during 2013.


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Other comprehensive loss at December 31, 2013 of $123 million includes negative currency translation adjustments of $447 million, a positive adjustment of $323 million related to the funded status of retirement obligations and a positive adjustment of $1 million related to derivative instruments. 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 adjustment primarily resulted from currency movements of $342 million in South America, principally related to Brazil and Argentina as well as from $137 million in North America primarily related to Canada and Mexico. The positive pension funded status impact is primarily related to the improvement of the funded status of the pension and postretirement benefits other than pensions ("OPEB") plans driven principally by actuarial gains and losses of $395 million. Of this amount $165 million relates to assets returns in excess of assumed returns. The remaining $230 million primarily relates to the impact of higher discount rates (see note 16 to the consolidated financial statements).
The number of employees at December 31, 2013 was 27,560, reflecting an increase of 1,021 employees from December 31, 2012. This increase primarily reflects the impact of the NuCO2 acquisition.

2012 Compared With 2011

Sales in 2012 were comparable to 2011. Higher volumes and price, primarily in North America and Asia, were offset by negative currency translation impacts, due to the strengthening of the U.S. dollar against most global currencies, primarily the Brazilian Real and the Euro, and lower cost pass-through, primarily lower natural gas prices.
Gross margin in 2012 increased $34 million, or 1%, versus 2011. The modest increase in the gross margin percentage to 43.0% in 2012 versus 42.6% in 2011 was due primarily to the impact of lower natural gas cost pass-through to customers.
Selling, general and administrative ("SG&A") expenses in 2012 were $1,270 million, or 11.3% of sales, versus $1,239 million, or 11.0% of sales, for 2011. The increase in SG&A expense of $31 million was due to the impact of acquisitions ($44 million), and higher pension expense ($23 million) related to an increase in the amortization of net actuarial gains/losses, primarily attributable to lower discount rates. The effect of currency translation reduced SG&A expense by $48 million.
Depreciation and amortization expense in 2012 decreased $2 million versus 2011 due to currency effects.
Other income (expenses) - net in 2012 was a $43 million benefit versus a $7 million benefit in 2011. The change in 2012 versus 2011 was primarily due to gains on asset sales in North America and Asia, and a litigation settlement in South America, partially offset by business restructuring charges in South America and currency related losses. See Note 7 to the consolidated financial statements for a summary of the major components of Other income (expenses) - net.
Reported operating profit of $2,437 million in 2012 was $31 million, or 1% lower than operating profit of $2,468 million in 2011. As a percentage of sales, reported operating profit decreased to 21.7% in 2012 from 21.9% in 2011. This is primarily due to the $65 million cost reduction program and pension settlement charge in 2012. Adjusted operating profit of $2,502 million in 2012 was $33 million, or 1% higher than adjusted operating profit of $2,469 million in 2011. As a percentage of sales, adjusted operating profit improved to 22.3% in 2012 versus 21.9% in 2011. A discussion of operating profit by segment is included in the segment discussion that follows.
Interest expense - net in 2012 decreased $4 million, versus 2011. Lower interest rates reduced interest expense by approximately $30 million. Additionally, higher capitalized interest, due to higher capital expenditures, reduced interest expense by approximately $8 million. These reductions were partially offset by the impact of higher debt which increased interest expense by approximately $29 million. The remaining variance of $5 million related to miscellaneous other items, none of which were significant. See Note 7 to the consolidated financial statements for further information relating to interest expense.
The effective tax rate for 2012 was 25.5% versus 27.6% in 2011. The reduction in the effective rate in 2012 compared to 2011 was primarily driven by the $55 million income tax benefit related to the loss on a liquidated subsidiary. The adjusted effective tax rate for 2012 was 28.0%, versus 27.8% in 2011. Praxair's significant equity investments are in the United States, China, Italy, and the Middle East. Equity income decreased $6 million in 2012 related primarily to the negative impact of currencies and the consolidation of Yara Praxair in the fourth quarter of 2011 which was previously accounted for as an equity investment.
At December 31, 2012, reported noncontrolling interests consisted primarily of noncontrolling shareholders' investments in Asia (primarily in China and India), Europe (primarily in Italy and Scandinavia), and North America (primarily within the U.S. packaged gas business). The $2 million increase in noncontrolling interests in 2012 was


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primarily due to the impact of the consolidation of Yara Praxair as a result of obtaining a controlling ownership interest in the fourth quarter of 2011, partially offset by cost reduction charges in the European investments and the negative impact of currency on European and Asian investments. Adjusted noncontrolling interests was $54 million in 2012 compared to $51 million in the prior year.
Reported net income - Praxair, Inc. of in 2012 was $1,692 million, or $20 million higher than net income- Praxair, Inc. of $1,672 million in 2011. The increase in reported net income - Praxair, Inc from 2011 to 2012 was the result of a non-recurring gain on acquisition in 2011 offset by the aforementioned income tax benefit in 2012. Adjusted net income - Praxair, Inc. of $1,681 million in 2012 was $15 million, or 1% higher than adjusted net income - Praxair, Inc. of $1,666 million in 2011. The increase was due to higher adjusted operating profit and lower interest expense partially offset by lower income from equity investments.
Reported diluted EPS of $5.61 in 2012 increased $0.16 per diluted share, or 3%, from adjusted diluted EPS of $5.45 in 2011. Adjusted diluted EPS of $5.57 in 2012 increased $0.14 per diluted share, or 3%, from adjusted diluted EPS of $5.43 in 2011. The increase in both reported and adjusted diluted EPS was primarily due to higher net income - Praxair, Inc. and a 2% decrease in the number of diluted shares outstanding as a result of the company's net repurchases of common stock during 2012.
Other comprehensive income (loss) for the year ended December 31, 2012 of $1,586 million includes positive translation adjustments of $4 million and a negative adjustment of $108 million 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 positive translation adjustments primarily resulted from currency movements in North American ($99 million related to Canada and Mexico), Asia ($40 million related primarily to Korea), and Europe ($31 million). These positive impacts were largely offset by a negative currency adjustment of $171 million in South America, primarily related to Brazil and Argentina. The negative pension funded status impact resulted primarily from current year net actuarial losses, due primarily to lower discount rates. See Note 16 to the consolidated financial statements for a summary of the pension funded status components recognized in other comprehensive income (loss).
The number of employees at December 31, 2012 was 26,539, reflecting an increase of 355 employees from December 31, 2011. This increase reflects acquisitions and additions in growing businesses, partially offset by the impact of cost reduction plans put in place during the fourth quarter of 2011 and the third . . .

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