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SEGMENT DISCUSSION
The following summary of sales and operating profit
by segment provides a basis for the discussion that follows:
|
VARIANCE
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|||||||
|
|
|
|
 |
|
||
| (Millions od dollars) YEAR ENDED DECEMBER 31, |
2003
|
2002
|
2001
|
2003 vs.
2002 |
2002 vs.
2001 |
||
|
|
|
|
|
|
|
|
| SALES | |||||||
| North America |
$3,627
|
$3,351
|
$3,434
|
+8
|
% |
-2
|
% |
| Europe |
699
|
589
|
537
|
+19
|
% |
+10
|
% |
| South America |
708
|
632
|
674
|
+12
|
% |
-6
|
% |
| Asia |
389
|
324
|
255
|
+20
|
% |
+27
|
% |
| Surface Technologies |
400
|
394
|
410
|
+2
|
% |
-4
|
% |
| Eliminations |
(210)
|
(162)
|
(152)
|
||||
|
|
|
|
|
|
|
|
|
$5,613
|
$5,128
|
$5,158
|
+9
|
% |
-1
|
% | |
 |
|
|
|
|
|
|
|
| OPERATING PROFIT(a,b) | |||||||
| North America |
$ 548
|
$ 557
|
$ 545
|
-2
|
% |
+2
|
% |
| Europe |
170
|
139
|
119
|
+22
|
% |
+17
|
% |
| South America |
114
|
134
|
129
|
-15
|
% |
+4
|
% |
| Asia |
64
|
51
|
38
|
+25
|
% |
+34
|
% |
| Surface Technologies |
26
|
35
|
39
|
-26
|
% |
-10
|
% |
| All Other |
—
|
7
|
—
|
||||
|
|
|
|
|
|
|
|
|
$922
|
$923
|
$870
|
0
|
% |
+6
|
% | |
|
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|
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|
|
| (a) Praxair recorded pre-tax charges
totaling $70 million in the third quarter of 2001 which are not included
in Praxair’s management reporting definition of operating profit (see
Note 3 to the consolidated financial statements).
Segment operating profit in 2001 excluded $70 million of special charges
as follows: North America, $26 million; Europe, $3 million; South
America, $30 million; Surface Technologies, $4 million; and All Other
$7 million. (b) Effective in 2002, Praxair adopted SFAS 142, which eliminated the amortization of goodwill prospectively. Goodwill amortization included in the year ended December 31, 2001 was $38 million as follows: North America, $20 million; Europe, $4 million; South America, $9 million; Asia, $3 million; and Surface Technologies, $2 million. |
|||||||
NORTH AMERICA
The North America operating segment includes Praxair’s industrial
and packaged gases operations in the U.S., Canada and Mexico. Praxair’s
U.S. and Canadian packaged gases operations within the North American
industrial gases business are collectively referred to as Praxair Distribution.
North America also includes several product lines servicing the electronics
and healthcare industries.
Sales for 2003 increased $276 million, or 8%, versus 2002. The effect of escalating natural gas costs for hydrogen customers increased sales 3% with no impact on operating profit. Overall price increases of 3% were primarily realized in our U.S. and Canadian on-site, merchant and packaged gas business units and in Mexico. Acquisitions by our healthcare and packaged gas business units increased sales by 1%. Sales volumes continued to improve in the chemical, energy, manufacturing and metals end markets as manufacturing activity improved resulting in an increase in sales of 1%.
Operating profit for 2003 decreased $9 million, or 2%, versus 2002. Excluding electricity costs, realized price increases and continued focus on productivity and purchasing initiatives offset underlying inflationary pressures on our cost structures. Electricity costs, on average, increased by 15% in the United States, which marginally outpaced realized price increases primarily in our merchant markets. In addition, tough market conditions prevailed in the first half of 2003 in our electronics markets, marginally decreasing operating profit versus 2002.
Sales for 2002 decreased $83 million, or 2%, versus 2001. The effect of lower natural gas costs reduced sales 2% to hydrogen customers with no impact on operating profit. Overall, realized price increases offset currency devaluations in Mexico and Canada. Acquisitions in North American healthcare and packaged gases increased sales by 2% while lower sales volumes reduced sales by 3% primarily in the packaged gases business as the company focused on tactics to gain share in industrial gases versus lower margin hardgoods. Sales volumes improved in Mexico and healthcare as growth initiatives continued to be implemented. Electronics sales decreased as the slump in worldwide semiconductor markets continued.
Operating profit increased $12 million, or 2%, versus 2001. The elimination of goodwill amortization in 2002 resulted in an improvement of $20 million. Excluding this impact, operating profit decreased 1%. Realized price increases and cost reductions related to productivity initiatives and the restructuring in 2001 offset inflationary pressures on North American cost structures. The impact of lower sales volumes on operating profit was partially mitigated by the effect of North American healthcare organic growth and acquisitions, and good operating-margin enhancement programs in Mexico.
Beginning in 2005, the Medicare Prescription Drug Improvement and Modernization Act of 2003 may reduce sales of certain healthcare products by approximately $5 million to $9 million. Management is currently reviewing the impact of this legislation, but expects to mitigate this exposure with cost reductions in production and distribution.
EUROPE
Praxair’s European industrial gases business is primarily in Italy
and Spain with additional operations in Benelux, Germany, France and Israel.
On January 31, 2003, Praxair completed the sale of its Polish business
for approximately $50 million. Praxair Polska had $26 million in sales
for 2002. On November 26, 2003, Praxair acquired the remaining shares
of its Belgium Indugas joint venture and began consolidating its financial
results. Indugas had $35 million in sales during 2003.
Sales for 2003 increased $110 million, or 19%, versus 2002. The favorable impact of the stronger Euro currency increased sales by 19%. Sales volumes and realized price increases each favorably impacted sales by 2%, offsetting the net decrease in sales resulting from the Poland divestiture and the Indugas consolidation. Market share penetration in the manufacturing, healthcare and metals markets principally drove the sales volume gains.
Operating profit for 2003 increased $31 million, or 22%, versus 2002. The favorable impact of the Euro currency generated 17% of this increase. Underlying operating profit grew 9% as cost reduction programs, the Indugas consolidation, and operating leverage on the sales volume growth significantly outpaced the net impact of pricing and inflation on cost structures. The divestiture of the Poland operations adversely impacted operating profit by 4%.
Sales for 2002 increased $52 million, or 10%, versus 2001. Fueled by infrastructure investments in Spain and market share gains in the food and beverage and welding markets, volumes increased strongly in Europe by 5%. Favorable currency movements impacted sales growth by an additional 4%.
Operating profit for 2002 increased $20 million, or 17%, versus 2001. Currency favorably increased operating profit by 7%. Productivity programs offset inflationary pressures on the underlying cost structure. The favorable sales volume impact resulted in an improvement of 8% on operating profit. The elimination of goodwill amortization in 2002 had a favorable impact of 3%.
SOUTH AMERICA
Praxair’s South American industrial gases operations are conducted
by its subsidiary, White Martins Gases Industriais Ltda. (White Martins),
which is the largest industrial gases company in Brazil. White Martins
also has operations in Argentina, Bolivia, Chile, Colombia, Paraguay,
Peru, Uruguay and Venezuela.
Sales for 2003 increased $76 million, or 12%, versus 2002. The effects of currency adversely impacted reported sales by 7% due principally to devaluation of the Brazilian real which stabilized in the second half of 2003 at approximately 2.9 per U.S. dollar. Strong pricing initiatives resulted in an increase to sales of 9%. Sales volumes were strong, increasing sales by 9% due to strong sales to metal manufacturers supplying export markets, healthcare and chemical customers.
Operating profit for 2003 decreased $20 million, or 15%, versus 2002. 2003 operating profit included $2 million of net income hedge losses and a $5 million expense related to the settlement of legal matters. 2002 operating profit included $20 million of net income hedge gains. Excluding these impacts, underlying operating profit increased 6%. Continued focus on productivity initiatives and pricing actions mostly offset the unfavorable impact of inflation. Severance costs decreased operating profit by 4% as South American management continued to implement productivity improvements. Increased sales volumes improved operating profit by 14% demonstrating favorable operating leverage. In October of 2003, the Brazilian government enacted an increase of 3% to 7.6% to its social security financing tax, which became effective on February 1, 2004. The tax is levied on Brazilian sales and management believes that most, if not all, of the impact can be passed along to customers.
Sales for 2002 decreased $42 million, or 6%, versus 2001. In 2002, the effects of currency devaluations were substantial and adversely impacted reported sales by $149 million, or 22%. Strong pricing initiatives were implemented resulting in a realized price increase of 12%. Sales volumes continued to grow steadily as new, less capital-intensive opportunities were pursued in metal fabrication, pipeline management, site-gas management and recycling market places.
Operating profit for 2002 increased $5 million, or 4%, versus 2001. The elimination of goodwill amortization in 2002 resulted in an improvement of $9 million, or 7%. Excluding this impact, operating profit decreased 3%. 2002 operating profit included a net income hedge gain of $20 million while 2001 included a net income hedge loss of $2 million. The net impact of currency devaluations, inclusive of net income hedges, decreased operating profit by 5%, versus 2001. Partially offsetting this decrease was favorable sales volume growth and cost reduction initiatives which outpaced inflationary impacts on cost structures. The effects of the general strike in Venezuela had a small adverse impact in 2002.
There are significant uncertainties surrounding the economic and political stability in South America which may result in significant currency movements versus the U.S. dollar. During 2003, the fluctuations in the Brazilian real, Venezuelan bolivar and the Argentine peso versus the U.S. dollar resulted in a benefit of approximately $148 million (a charge of $375 million in 2002) to accumulated other comprehensive income in shareholders’ equity. Looking forward, it is not possible to accurately predict how currency fluctuations will impact financial results.
Currency movements versus the U.S. dollar have historically impacted reported results, especially in Brazil, Argentina and Venezuela. In 2003, Brazil represented approximately 79% of the company’s South American sales, Venezuela represented approximately 4% and Argentina represented approximately 5%. The functional currency used for translation to the U.S. dollar for Argentina and Brazil are the peso and real, respectively. The company uses the U.S. dollar in Venezuela as its functional currency as it is a highly inflationary economy in accordance with SFAS 52.
To help understand the reported results, the following
is a summary of the exchange rates used to translate the financial statements
in Brazil, Argentina and Venezuela (rates of exchange expressed in units
of local currency per U.S. dollar):
|
INCOME STATEMENT
|
BALANCE SHEET
|
|||||
|
|
|
|
|||
|
AVERAGE YEAR TO DATE
DECEMBER 31, |
DECEMBER 31,
|
|||||
|
|
|
|
|
|
|
| CURRENCY |
2003
|
2002
|
2001
|
2003
|
2002
|
|
|
|
|
|
|
|
|
| Brazil real |
3.06
|
2.92
|
2.36
|
2.89
|
3.53
|
|
| Argentina peso |
2.95
|
3.16
|
1.00
|
2.93
|
3.37
|
|
| Venezuela bolivar |
1,609
|
1,162
|
747
|
1,600
|
1,401
|
|
|
|
|
|
|
|
|
ASIA
The Asia segment includes Praxair’s industrial gases operations primarily
in China, India, Korea and Thailand, with smaller operations in Japan,
Malaysia and Taiwan. Operations in China are also conducted through non-consolidated
joint venture companies accounted for as equity investments.
Sales for 2003 increased $65 million, or 20%, versus 2002. Strong volume growth in Chinese metals and electronics markets, Korean electronics markets, Indian metals markets, and Thailand food markets led to volume growth of 14%. Praxair increased its ownership and began consolidating joint venture companies in China, increasing sales by $10 million, or 3%. The effects of favorable currency rates primarily in India, Thailand and Korea, favorably impacted sales by 3%. Management continues to focus investment in China for growth opportunities.
Operating profit for 2003 increased $13 million, or 25%, versus 2002. The consolidation of the joint venture increased operating profit by 6%. Operating profit grew 29% from increased sales volumes as favorable operating leverage was realized on plant infrastructure investments. Cost productivity initiatives partially mitigated the impacts of cost inflation.
Sales for 2002 increased $69 million, or 27%, versus 2001. During the 2001 third quarter, and the first quarter of 2002, Praxair increased its ownership and began consolidating joint venture companies in India and China, respectively, increasing 2002 sales by $51 million or 20%. The remaining sales increase is due to strong volume growth and price increases.
Operating profit for 2002 increased $13 million, or 34%, versus 2001. The consolidation of the India and China joint venture companies increased operating profit by $12 million or 32%. The remaining increase was a result of sales volume growth, productivity initiatives and the elimination of goodwill amortization, partially offset by cost inflation.
SURFACE TECHNOLOGIES
Praxair’s worldwide Surface Technologies business operates primarily
in the U.S. and Europe, with smaller operations in Asia and Brazil.
Sales for 2003 increased $6 million, or 2%, versus 2002 as favorable currency impacts outpaced declining sales volumes. The lower volumes reflect market weakness in the global coatings and aviation services business units.
Operating profit for 2003 decreased $9 million, or 26%, versus 2002 as weakening volumes outpaced cost reduction initiatives. In 2003, $2 million of severance expense was incurred to reduce cost structures in reaction to difficult market conditions in global coatings and aviation services, providing the foundation for favorable operating leverage when market conditions improve.
Sales for 2002 decreased $16 million, or 4%, versus 2001 due primarily to lower sales volumes. The lower volumes reflect weakness in the global coatings and aviation services businesses.
Operating profit decreased $4 million, or 10%, versus 2001. A 5% improvement in operating profit from the discontinuation of goodwill amortization in 2002 was more than offset by volume declines.
ALL OTHER
The 2002 operating income of $7 million represents a net gain related
to the settlement of litigation.
