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CONSOLIDATED RESULTS
The following table provides summary data for 2003,
2002 and 2001:
|
VARIANCE
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 |
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| (Millions
of dollars) YEAR ENDED DECEMBER 31, |
2003
|
2002
|
2001
|
(a,b) |
2003 vs. 2002
|
2002 vs. 2001
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| Sales |
$5,613
|
$5,128
|
$5,158
|
+9
|
% |
-1
|
% | |||
| Gross margin(c) |
$2,285
|
$2,178
|
$2,098
|
+5
|
% |
+4
|
% | |||
| As
a percent of sales |
40.7
|
% |
42.5
|
% |
40.7
|
% | ||||
| Selling, general and administrative |
$ 766
|
$ 751
|
$ 699
|
+2
|
% |
+7
|
% | |||
| As
a percent of sales |
13.6
|
% |
14.6
|
% |
13.6
|
% | ||||
| Depreciation and amortization |
$ 517
|
$ 483
|
$ 499
|
+7
|
% |
-3
|
% | |||
| Other income (expenses) net |
$ (5)
|
$ 48
|
$ (34)
|
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| Operating profit |
$ 922
|
$ 923
|
$ 800
|
0
|
% |
+15
|
% | |||
| Interest expense |
$ 151
|
$ 206
|
$ 224
|
-27
|
% |
-8
|
% | |||
| Effective tax rate |
22.6
|
% |
22.0
|
% |
23.4
|
% | ||||
| Income before cumulative effect of accounting
changes |
$ 585
|
$ 548
|
$ 432
|
+7
|
% |
+27
|
% | |||
| Number of employees |
25,438
|
25,010
|
24,271
|
+2
|
% |
+3
|
% | |||
 |
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| (a) Praxair adopted Statement
of Financial Accounting Standards (SFAS) 142, which eliminated the
amortization of goodwill beginning in 2002. 2001 reported results
included goodwill amortization of $38 million pre-tax and $33 million
after-tax. (b) 2001 reported results include a pre-tax special charge of $70 million ($57 million after-tax) related to restructuring and other actions. The charge was recorded as: $7 million in cost of sales, $5 million in selling, general and administrative, and $58 million in other income (expenses) - net (see Note 3 to the consolidated financial statements). (c) Gross margin excludes depreciation and amortization expense. |
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2003 COMPARED WITH 2002
Sales in 2003 increased $485 million, or 9%, versus 2002. Realized price
increases, principally in South America, North America and Europe, increased
sales 3%. Overall, currency increased sales by 2%, largely due to the
progressive strengthening of the Euro versus the U.S. dollar throughout
2003. Sales increased 1% due to volume as all geographic segments reported
year-over-year improvement. Strong volume growth in Asia and South America
within the electronics, energy, metals and manufacturing markets offset
sluggish but improving conditions in North America markets. Increased
natural gas costs, which Praxair is contractually obligated to pass on
to on-site hydrogen customers, increased sales by 2%, with no impact on
operating profit. Acquisitions in healthcare, packaged gas and on-site
markets worldwide increased sales by 1%.
Gross margin in 2003 improved $107 million, or 5%, versus 2002. Gross margin as a percent of sales declined 180 basis points to 40.7%, versus 2002. A 70 basis-point reduction in gross margin percentage was a result of increased natural gas cost pass-throughs, which had no impact on reported gross margin. Energy costs grew faster than our ability to increase prices, primarily in the North American merchant market, further dampening our gross margin as a percent of sales.
Selling, general and administrative expenses in 2003 were $766 million, or 13.6% of sales, versus $751 million or 14.6% of sales for 2002. The dollar increase was principally the result of currency appreciation in Europe and acquisitions. Excluding those factors, underlying operational expenses were essentially flat as a result of continued focus on productivity initiatives.
Depreciation and amortization in 2003 increased $34 million, or 7%, versus 2002. The increase was due to an increase in capital expenditures of $22 million, $9 million in currency appreciation and $3 million in business acquisition activity.
Other income (expenses) — net in 2003 was a loss of $5 million in 2003 versus a $48 million gain in 2002. 2003 included $9 million of losses on net income hedges (primarily in Europe and Brazil). 2002 included $17 million of net income hedge gains (primarily in Brazil) and a $7 million gain from a favorable litigation settlement. Refer to Note 6 to the consolidated financial statements for a summary of the major components of other income (expenses) — net.
Operating profit in 2003 was $922 million, flat compared to 2002. Excluding the impacts of net income hedges in both periods and the litigation settlement in 2002, underlying operating profit improved 4% primarily due to continued progress on productivity initiatives and currency appreciation of the Euro which outpaced inflationary pressures on cost structures.
Interest expense in 2003 declined $55 million, or 27%, versus 2002. The reduction in interest expense is primarily due to the 2002 and 2003 refinancings of debt at lower interest rates.
The effective tax rate for 2003 was 22.6%, versus 22.0% for 2002, due to the lower earnings contribution from Brazil, which has a lower effective tax rate, and lower interest expense in the U.S., which is deductible at a 35% marginal rate. A $10 million tax benefit was recorded in the second quarter of 2003 resulting from the resolution of various tax matters for previous years. For 2004, we expect a full year effective tax rate of approximately 25% as the tax benefit will not recur and effective tax rates in Europe and South America should continue to increase modestly.
At December 31, 2003, minority interests consist of minority shareholders’ investments in Europe (primarily Rivoira S.p.A. in Italy), North America (primarily within Praxair Distribution) and Asia (primarily China and India). The increase in minority interest of $4 million in 2003 was due primarily to the consolidation of joint ventures in Asia and Europe (as a result of increased ownership in these joint ventures).
Our significant equity investments are in Italy, the United States and Spain. Praxair’s share of net income from corporate equity investments increased $3 million in 2003 primarily due to improved profitability of its joint venture in Italy.
Income before accounting changes increased $37 million, or 7%, compared to 2002 primarily due to the reduction of interest expense.
The number of employees at December 31, 2003 was
25,438, reflecting an increase of 428 employees from December 31, 2002.
This increase related primarily to new service initiatives in Brazil (+833),
partially offset by restructuring actions primarily in Surface Technologies
(-144) and the divestiture of Praxair’s operations in Poland (-170).
2002 COMPARED WITH 2001
Sales in 2002 decreased $30 million, or 1%, versus 2001. Realized price
increases in North and South America and acquisitions in our healthcare
portfolio each increased sales by 2%, respectively. Sales in 2002 were
reduced 3% from currency devaluations, principally in South America. Overall
sales volume declined 1% as manufacturing activity in the United States
remained sluggish, but was partially offset by volume gains in Europe
and Asia, and in the North American healthcare businesses. Reduced natural
gas costs, which Praxair is contractually obligated to pass on to on-site
hydrogen customers, decreased sales by 1%, with no impact on operating
profit.
Gross margin in 2002 improved $80 million, or 4%, versus 2001. Gross margin as a percent of sales improved 180 basis points to 42.5%, versus 2001. This improvement reflected realized pricing initiatives in the North and South American segments; worldwide productivity initiatives related to Six Sigma programs; and the benefits of the restructuring program initiated in the third quarter of 2001. A 60 basis-point improvement in gross margin percentage was a result of natural gas cost pass-throughs, which lowered reported sales, but had no impact on reported gross margins.
Selling, general and administrative expenses for 2002 were $751 million, or 14.6% of sales, versus $699 million, or 13.6% of sales for 2001. This increase reflects primarily North American healthcare acquisitions of $17 million. Other factors include service growth initiatives having a higher proportion of selling, general and administrative costs; higher bad-debt expense; and the effects of natural gas pass-through costs on sales.
Other income (expenses) — net in 2002 was a gain of $48 million compared to a loss of $34 million in 2001. 2001 included a $58 million special charge related primarily to severance and asset write-offs. 2002 included $17 million of gains on net income hedges (primarily in Brazil) versus $8 million of such losses in 2001 (primarily in Brazil and Mexico). Refer to Note 6 to the consolidated financial statements for a summary of the major components of other income (expenses) — net. See Note 3 to the consolidated financial statements for more information regarding special charges.
Operating profit in 2002 increased $123 million, or 15%, principally due to the $70 million special charge recorded in the third quarter of 2001 and the elimination of goodwill amortization in 2002 (2001 reported results included goodwill amortization of $38 million). Underlying operating profit increased 2% as a result of productivity improvements and benefits from the 2001 restructuring program which outpaced inflationary pressures.
Interest expense in 2002 declined $18 million, or 8% versus 2001. The decline in interest expense is primarily due to the refinancing of debt at lower interest rates and the reduction of debt versus 2001 levels. 2002 interest expense included $15 million of costs from the early retirement of $300 million of bonds.
The effective tax rate for 2002 was 22.0% versus 23.4% for 2001. The decrease is largely attributable to the effects of foreign tax planning and the discontinuation of goodwill amortization in 2002.
The increase in minority interest of $2 million in 2002 versus 2001 was due to the consolidation of joint ventures in Asia (as a result of our increased ownership in joint venture companies in India and China).
Praxair’s share of net income from corporate equity investments, reflecting activity primarily in Belgium, China and Turkey, was flat for 2002 compared to 2001.
Income before accounting changes increased $116 million, or 27%, reflecting the after-tax benefits of the improvement in operating profit discussed above and lower interest expense due to debt refinancing at lower rates and debt reductions in 2002.
The number of employees at December 31, 2002 was 25,010, which reflected an increase of 739 employees from December 31, 2001. This increase related primarily to acquisitions (approximately 680 employees) and new service initiatives in Brazil, partially offset by restructuring actions.
ACCOUNTING CHANGES
In the second quarter of 2002, Praxair completed the initial goodwill
impairment tests required for the adoption of SFAS 142. These tests indicated
an impairment of goodwill related to previous acquisitions. As a result,
a $139 million non-cash transition charge to earnings was recorded as
a cumulative effect of an accounting change, retroactive to January 1,
2002. In the first quarter of 2001, a one-time transition charge of $2
million was recorded for the adoption of SFAS 133, which established new
accounting rules for derivatives. For more information, see Note
2 to the consolidated financial statements.
RELATED PARTY TRANSACTIONS
The company’s related parties are primarily unconsolidated equity
affiliates. The company did not engage in any material transactions involving
related parties that included terms or other aspects that differ from
those which would be negotiated with independent parties.
COSTS RELATING TO THE ENVIRONMENT
Praxair’s principal operations relate to the production and distribution
of atmospheric and other industrial gases, which historically have not
had a significant impact on the environment. However, worldwide costs
relating to environmental protection may continue to grow due to increasingly
stringent laws and regulations, and Praxair’s ongoing commitment
to rigorous internal standards. Environmental protection costs in 2003
included approximately $10 million in capital expenditures and $14 million
of expenses, including $3 million for remediation projects. Environmental
protection expenditures were approximately $2 million to $3 million higher
in 2003 versus 2002 due to the construction of new hydrogen plants. Praxair
anticipates that future environmental protection expenditures will be
similar to 2003. Based on historical results and current estimates, management
does not believe that environmental expenditures will have a material
adverse effect on the consolidated financial position or on the consolidated
results of operations or cash flows in any given year.
LEGAL PROCEEDINGS
See Note 20 to the consolidated financial statements
for information concerning legal proceedings.
