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LIQUIDITY, CAPITAL RESOURCES AND FINANCIAL
DATA
| (Millions of dollars) YEAR ENDED DECEMBER 31, |
2003
|
2002
|
2001
|
|||
 |
|
|
|
|
|
|
| NET CASH PROVIDED BY (USED FOR) |
||||||
| OPERATING ACTIVITIES | ||||||
| Net income plus depreciation andamortization, accounting
change and special charges |
$ 1,102
|
$1,031
|
$ 987
|
|||
| Working capital |
(58)
|
(27)
|
55
|
|||
| Other net |
93
|
(3)
|
(22)
|
|||
|
|
|
|
|
|
|
|
| Total provided by operating activities |
$ 1,137
|
$1,001
|
$1,020
|
|||
|
|
|
|
|
|
|
| INVESTING ACTIVITIES | ||||||
| Capital expenditures |
$ (983)
|
$ (498)
|
$ (595)
|
|||
| Acquisitions |
(73)
|
(113)
|
(213)
|
|||
| Divestitures and asset sales |
64
|
24
|
45
|
|||
|
|
|
|
|
|
|
| Total used for investing |
$ (992)
|
$ (587)
|
$ (763)
|
|||
|
|
|
|
|
|
|
| FINANCING ACTIVITIES | ||||||
| Debt increases (reductions) |
$ 43
|
$ (245)
|
$ (189)
|
|||
| Minority transactions and other |
(5)
|
27
|
(14)
|
|||
| Issuances (purchases) of stock |
(25)
|
(70)
|
66
|
|||
| Cash dividends |
(149)
|
(123)
|
(110)
|
|||
|
|
|
|
|
|
|
| Total used for financing |
$ (136)
|
$ (411)
|
$ (247)
|
|||
|
|
|
|
|
|
|
| DEBT-TO-CAPITAL RATIO AT DECEMBER 31 | ||||||
| Debt |
$2,816
|
$2,748
|
$2,989
|
|||
| Capital (a) |
$6,099
|
$5,252
|
$5,627
|
|||
| Debt-to-capital ratio |
46.2
|
% |
52.3
|
% |
53.1
|
% |
 |
|
|
|
|
|
|
| (a)Includes debt, minority interests, preferred stock and shareholders’ equity. See the Five-Year Financial Summary. | ||||||
CASH
FLOW FROM OPERATIONS
Cash flow from operations increased $136 million
to $1,137 million in 2003 from $1,001 million in 2002. The improvement
is due to increased earnings, an increase in Non-cash (benefits) charges
and other and from a reduction in cash payments related to the 2000 and
2001 special charges (see Note 3 to the consolidated
financial statements).
Cash flow from operations decreased $19 million to $1,001 million in 2002 from $1,020 million in 2001. This marginal decrease related primarily to working capital, which reflected continued improvement in receivables and inventory management, more than offset by reductions in accounts payable.
INVESTING
Cash flow used for investing in 2003 totaled $992 million, an increase
of $405 million from 2002. The increase is primarily related to the purchase
of leased assets for $339 million in June 2003 in response to favorable
financing conditions (see Note
5 to the Consolidated Financial Statements) and increased capital
expenditures for two new steam methane reformers to support North American
hydrogen customers. Cash flow used for investing in 2002 totaled $587
million, a decrease of $176 million from 2001. This decrease was due to
lower capital expenditures in most business units and decreased healthcare
acquisitions versus 2001. The reduction of capital expenditures from 2001
to 2002 was in response to the economic slowdown in several markets, and
increased financial rigor in Praxair’s capital appropriation process.
Acquisition
expenditures for 2003 totaled $73 million, a decrease of $40 million from
2002. Acquisition expenditures for 2002 totaled $113 million, a decrease
of $100 million from 2001. The decrease in both years was due to the smaller
number of and amounts paid for acquisitions related to the North American
healthcare and electronics businesses.
Divestitures and asset sales in 2003 totaled $64 million, an increase of $40 million from 2002. The increase is due primarily to the sale of Praxair’s Polish business for approximately $50 million. Divestitures and asset sales in 2002 totaled $24 million, a decrease of $21 million from 2001. The decrease is due largely to the absence of $17 million of sale proceeds in 2001 for the sale of an investment in Asia.
On a worldwide basis, capital expenditures for the full year 2004 are expected to be in the range of $700 million, anticipating additional investment in hydrogen infrastructure and significant investment in China to supply new contracts awarded in 2003. At December 31, 2003, $222 million of the capital expenditures had been approved and committed. Acquisition expenditures will depend on the availability of opportunities at attractive prices.
FINANCING
Praxair’s financing strategy is to secure
sufficient funds to support its operations in the U.S. and around the
world using a combination of local borrowing and intercompany funding
to minimize the total cost of funds and to manage and centralize currency
exchange exposures. Praxair manages its exposure to interest rate changes
through the use of financial derivatives (see Note
15 to the consolidated financial statements and the section entitled
“Market Risks and Sensitivity Analyses”).
At
December 31, 2003, the company’s total debt outstanding was $2,816
million, an increase of $68 million from 2002. The December 31, 2003 debt
balance is comprised of $2,352 million in public notes, $218 million in
commercial paper, and the remaining $246 million represents primarily
bank borrowings from around the world. As of December 31, 2003, there
were no borrowings under Praxair’s $1 billion U.S. bank credit facility.
As the result of strong operating cash flow and favorable liquidity, the
company canceled its $500 million 364-day revolving credit facility. As
a result of the company’s overall improved financial condition, Standard
and Poor’s upgraded the company’s long-term debt rating from
BBB+ to A- and Moody’s issued a favorable outlook on the company’s
A3 rating. Commercial paper was rated P2 by Moody’s and A2 by Standard
& Poor’s. At December 31, 2003, Praxair was in compliance with
its borrowing covenants.
During 2003, Praxair repaid $300 million of 6.75% notes, $75 million of 6.625% notes, and $250 million of 6.15% notes that were due on March 1, 2003, March 15, 2003, and April 15, 2003, respectively. The repayments were funded through the issuance of commercial paper. During 2002, Praxair redeemed the 8.7% debentures due 2022 resulting in an additional $15 million charge recorded within interest expense for the year ended December 31, 2002.
During 2003, Praxair issued $350 million of 3.95% notes due 2013 and $300 million of 2.75% notes due 2008. The proceeds of these debt issuances were used to refinance commercial paper and purchase $339 million of previously leased assets. During 2002, Praxair issued $500 million of 6.375% notes due 2012 and $250 million of 4.75% notes due 2007. The proceeds were used to repay outstanding commercial paper.
Our debt-to-capital ratio decreased to 46.2% at December 31, 2003 from 52.3% at December 31, 2002. This decrease is due to an increase in the shareholders’ equity component of capital resulting from the impact of 2003 net income and favorable translation adjustments (see the Five Year Financial Summary for a definition of debt-to-capital).
OFF-BALANCE SHEET ARRANGEMENTS
AND CONTRACTUAL OBLICATIONS
The following table sets forth Praxair’s material contractual obligations
and other commercial commitments as of December 31, 2003:
| (Millions of dollars) |
CONTRACTUAL OBLIGATIONS
|
OTHER COMMERCIAL COMMITMENTS
|
||||||
|
|
|
|
|
|
|
|
|
| Due or Expiring by December 31, |
Debt and
Capitalized
Lease
Maturities
|
Obligations
Under
Operating
Leases
|
Unconditional
Purchase
Obligations
|
Total
|
Construction
Commitments
|
Guarantees
and Other
|
Total
|
|
|
|
|
|
|
|
|
|
|
| 2004 |
$ 389
|
$ 69
|
$108
|
$ 566
|
$197
|
$121
|
$318
|
|
| 2005 |
172
|
55
|
67
|
294
|
25
|
4
|
29
|
|
| 2006 |
282
|
42
|
49
|
373
|
—
|
—
|
—
|
|
| 2007 |
516
|
23
|
41
|
580
|
—
|
—
|
—
|
|
| 2008 |
556
|
12
|
33
|
601
|
—
|
4
|
4
|
|
| Thereafter |
901
|
17
|
118
|
1,036
|
—
|
—
|
—
|
|
|
|
|
|
|
|
|
|
|
|
$2,816
|
$218
|
$416
|
$3,450
|
$222
|
$129
|
$351
|
||
|
|
|
|
|
|
|
|
|
Debt and capitalized lease maturities of $2,816 million are more fully described in Note 14 to the consolidated financial statements and are included on the company’s balance sheet as long- and short-term liabilities.
Obligations under operating leases of $218 million represent off-balance sheet, non-cancelable contractual obligations primarily for manufacturing and distribution equipment and office space. See Note 5 to the consolidated financial statements for further details.
Unconditional purchase obligations of $416 million represent contractual commitments under various long- and short-term take-or-pay arrangements with suppliers and are not included on Praxair’s balance sheet. These obligations are primarily minimum purchase commitments for electricity, natural gas and feedstock used to produce atmospheric gases, carbon dioxide and hydrogen. During 2003, payments under these contracts totaled $341 million, including $194 million for electricity and $83 million for natural gas. A significant portion of these risks are passed on to customers through similar take-or-pay contractual arrangements. Purchase obligations which are not passed along to customers do not represent a significant risk to Praxair. In addition, Praxair enters into contracts to purchase products and services that do not have minimum purchase provisions.
Construction commitments of $222 million represent outstanding commitments to customers or suppliers to complete authorized construction projects as of December 31, 2003. A significant portion of Praxair’s capital spending is related to the construction of new production facilities to satisfy customer commitments which may take a year or more to complete.
Guarantees and Other of $129 million include $80 million related to required minimum pension contributions and $49 million related to Praxair’s off-balance sheet contingent obligations under guarantees of certain debt of unconsolidated affiliates. Unconsolidated equity investees had total debt of approximately $145 million at December 31, 2003, which was non-recourse to Praxair with the exception of the guaranteed portions described above. Praxair has no financing arrangements with closely-held related parties.
See Note 20 to the consolidated financial statements for more information concerning commitments and contingencies. In addition, see Note 9 to the consolidated financial statements for a summary of long-term liabilities which consist primarily of pension and other post-retirement benefit costs (OPEB). Also, see the “Pension Benefits” section that follows for a discussion of funding obligations.
PENSION BENEFITS
The company completed its year-end pension plan calculations in early
January 2004 based on December 31, 2003 interest rates and asset values.
As a result, the non-cash minimum pension liability recorded at December
31, 2003 was reduced by $13 million to $152 million at December 31, 2003
($99 million after-tax) from $165 million at December 31, 2002 ($107 million
after-tax). The adjustment to the pension liability did not affect net
income as the offsetting, after-tax charge was made to accumulated other
comprehensive income within shareholders’ equity.
Pension contributions were $34 million in 2003 ($7 million in 2002). Estimates of required 2004 contributions are in the range of $80 million assuming that interest rate relief will become law. If interest rate relief legislation is not enacted, then our estimates of the 2004 contributions are in the range of $130 million. In February 2004, contributions 0f $60 million were paid.
For 2004, Praxair will leave its expected return on plan assets in the U.S. at 8.5%, identical to 2003. In 2004, consolidated pension expense is expected to be approximately $35 million versus $26 million in 2003 and $15 million in 2002.
INSURANCE
Praxair purchases insurance to limit a variety of risks, including those
related to workers compensation, liability (general, products, professional
and vehicles) and property. Praxair retains limited potential liability
related to deductible amounts. Liabilities related to reported and unreported
claims incurred are included in long- and short-term liabilities.
