Management's Discussion and Analysis
 Praxair's reported 2000 results versus 1999 reflect a 9% improvement in sales and a decrease in earnings due to repositioning and special charges of $117 million after tax. Excluding these charges, income before cumulative effect of accounting change increased 9% over 1999. These adjusted results reflect double digit earnings growth in the international industrial gases businesses, strong results in the U.S. industrial gases business despite high energy prices and a fourth quarter downturn, and disappointing results in Surface Technologies.

Consolidated Results
The following provides summary data for 2000, 1999 and 1998:


(Millions of dollars)
Year Ended December 31, 2000(a) 1999(a) 1998
Sales $5,043 $4,639 $4,833
Cost of Sales $3,075 $2,732 $2,807
Selling, general and administrative $683 $641 $644
Depreciation and amortization $471 $445 $467
Other income (expenses)-net ($42) $77 $13
Operating profit $707 $831 $856
Interest expense $224 $204 $260
Effective tax rate 21% 24% 21%
Income before cumulative effect of accounting change $363 $441 $425
Number of employees 23,430 24,102 24,834
.
Adjusted(b):
Cost of Sales $3,028 $2,732 $2,807
Selling, general and administrative $662 $641 $644
Other income (expenses)-net $49 $77 $42
Operating profit $866 $831 $885
Effective tax rate 23% 24% 25%
Income before cumulative effect of accounting change $480 $441 $425

 

(a)
The results for 2000 and 1999 versus 1998 were significantly impacted by the devaluation of the Brazilian currency (Real) from a rate of 1.21 Reais to the U.S. Dollar at December 31, 1998 to 1.79 at December 31, 1999 and 1.96 at December 31, 2000 (1.83 and 1.81 average rate for 2000 and 1999, respectively; versus a 1.16 average rate for 1998). Reported amounts from Brazil were all reduced in proportion to the exchange rate changes. Also, as described in Note 5 to the consolidated financial statements, in January 1999 Praxair entered into various currency exchange forward contracts to hedge anticipated Brazilian net income and a portion of its net investment. The net income hedges were settled during 1999 resulting in a non-recurring pre-tax gain of $21 million ($14 million after taxes and minority interests).

(b)
Adjusted results exclude the following special items: In 2000 repositioning and special charges totaling $159 million and income from equity investment charges of $2 million ($117 million after tax). In 1998, special charges totaling $29 million ($18 million after tax) for an impairment loss in Indonesia and a provision for an anticipated loss on the sale of an air separation plant to a third party (see Note 2 to the consolidated financial statements). Additionally, in 1998 Praxair recorded non-recurring tax credits of $18 million related to the favorable settlement of various tax matters. These items are collectively referred to as special items.

 

Special Items
Reported amounts for 2000 and 1998 include special items that affect period-to-period comparisons. The management's discussion and analysis that follows excludes the impact of these special items as described in footnote (b) to the above table.

2000 compared with 1999
The sales increase of 9% for 2000 as compared to 1999 was due primarily to industrial gases volume growth in all industrial gases businesses; acquisitions in the Surface Technologies segment; and price improvements in North and South America. These increases were partially offset by unfavorable currency translation impacts, primarily in Europe.

Operating profit increased 4% for 2000, excluding the impact of the special items, versus 1999. This increase was due primarily to the volume and price improvements described above, productivity improvements, and contributions from acquisitions in the Surface Technologies segment; partially offset by cost inflation and currency translation impacts. As a percentage of sales, selling, general and administrative expenses for 2000 were lower due primarily to productivity improvement initiatives and higher long-term incentive plan costs in 1999, partially offset by cost inflation and higher business development costs. The increase in depreciation and amortization expense reflects the impact of new projects coming on-stream, as well as Surface Technologies acquisitions. Other income (expenses)-net for 2000 was $49 million, a decrease of $7 million, excluding a $21 million currency hedge gain in 1999. (See Note 5 to the consolidated financial statements.)

Income before accounting change, excluding the special items, increased 9% for 2000 versus 1999. This increase was due to the higher operating profit described above and lower minority interests, partially offset by higher interest expense. The decrease in minority interests is due to the impact of the increase in Praxair's ownership interest in White Martins (See Note 7 to the consolidated financial statements and Segment Discussion-South America). Interest expense increased due to higher debt levels to fund the acquisition of minority interests in Brazil and higher short-term interest rates. Based on Praxair's tax planning strategies, the effective tax rate was lowered in 2000 to 23% from 25% in 1999, excluding the impact of the special items and the $21 million hedge gain in Brazil.

The number of employees at December 31, 2000 was 23,430, which reflects a decrease of approximately 700 from December 31, 1999. The decrease is principally the result of a divestiture and continued productivity improvement initiatives in South America, employee reductions in the Surface Technologies business and the 2000 repositioning and special charges.

1999 compared with 1998
The sales decrease of 4% in 1999 as compared to 1998 was due primarily to unfavorable currency translation effects in South America. This was partially offset by the impact of price increases in North and South America, continued volume growth in Asia and Europe, and volume growth in North America. Excluding the impact of currency, sales grew 2%.

Operating profit decreased 6% for 1999 as compared to 1998. This decrease was due to the sales decrease described above, cost inflation and currency translation impacts; partially offset by productivity improvements and the first quarter hedge gain in Brazil. Selling, general and administrative expenses for 1999 were slightly higher as a percentage of sales versus 1998 due primarily to long-term incentive plan costs, higher business development costs and cost inflation impacts; partially offset by productivity improvements. The decrease in depreciation and amortization expense reflects the impact of currency translation, primarily in Brazil, and the impact of the North American sale-leaseback transactions in 1999 and 1998; offset by new projects coming on-stream and packaged gases and Surface Technologies acquisitions.

Interest expense decreased $56 million or 22% for 1999 versus 1998 due primarily to currency translation effects and lower consolidated debt levels, especially in the South American segment, which had high interest rates.

Income before cumulative effect of accounting change increased 4% in 1999 as compared to 1998. This increase was due primarily to the lower interest expense and minority interests impacts offset by the lower operating profit. Praxair's return on average capital was 11.1% in 1999 and 1998.

The effective tax rate remained at 25%, excluding the impact of the first quarter hedge gain in Brazil, which is consistent with the effective tax rate before special charges in 1998.

The number of employees at December 31, 1999 decreased about 700 as compared to December 31, 1998 due primarily to Praxair's continued productivity improvement initiatives in North and South America and the divestiture of a business in Asia. The number of employees decreased despite the increase associated with about 500 employees added through acquisitions in Surface Technologies.