Global Finance 385simply translating into fewer dollars as well as (2) declines in the volume of for-
eign sales due to the weakening of the foreign currency.
The Philip Morris disclosures highlight the value of diversification in for-
eign sales by currency. Whereas revenues and profits were reduced by the de-
preciation of Western European and Latin American currencies, the Japanese
yen appreciated and offset, but not fully, these negative effects. Notice that
Philip Morris identifies the net effect of the appreciation and depreciation of
foreign currencies on both revenues and income.
Praxair provides sufficient detail to reconcile its actual percentage
growth or decline in sales to the results in the absence of changes in exchange
rates. Notice that Praxair ’s sales declined by 4% in 1999, and that the decline
was largely explained by currency depreciation in South America. However, ex-
plaining the behavior of sales in 1998 is more involved. The information dis-
closed by Praxair for 1998 is summarized here:
EXHIBIT 12.22 Exchange rate effects on sales and profit growth.
Galey & Lord Inc. (1999)
In addition to the direct effects of changes in exchange rates, which are a changed dollar
value of the resulting sales and related expenses, changes in exchange rates also affect the
volume of sales or the foreign currency sales price as competitors products become more or
less attractive.
Illinois Tool Works Inc. (1999)
The strengthening of the U.S. dollar against foreign currencies in 1999, 1998 and 1997
resulted in decreased operating revenues of $59 million in 1999, $122 million in 1998 and
$166 million in 1997 and decreased net income by approximately 1 cent per diluted share in
1999 and 4 cents per diluted share in 1998 and 1997.
Philip Morris Companies Inc. (1999)
Currency movements decreased operating revenues by $782 million ($517 million, after
excluding excise taxes) and operating companies income by $46 million during 1999. Declines
in operating revenues and operating companies income arising from the strength of the U.S.
dollar against Western European and Latin American currencies were partially mitigated by
currency favorabilities recorded against the Japanese yen and other Asian currencies.
Praxair Inc. (1999)
The sales decrease of 4% in 1999 as compared to 1998 was due primarily to unfavorable
currency translation effects in South America. Excluding the impact of currency, sales grew
by 2%.
The productivity improvements and currency translation impacts resulted in an $18 million
decrease in selling, general, and administrative expenses despite the increase due to
acquisitions.
Sales for 1998 were f lat when compared to 1997, primarily because sales volume growth of
4% and price increases of 2% were offset by negative currency translation effects.
SOURCES: Companies’ annual reports. The year following each company name designates the annual re-
port from which each example is drawn.