10-Q 1 px-q3201410q.htm PRAXAIR, INC. 2014 THIRD QUARTER FORM 10-Q PX-Q3 2014 10Q
 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2014
OR
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
PRAXAIR, INC.
(Exact name of registrant as specified in its charter)
DELAWARE
(State or other jurisdiction of incorporation)
1-11037
 
06-1249050
(Commission File Number)
 
(IRS Employer Identification No.)
 
 
39 OLD RIDGEBURY ROAD, DANBURY, CT
 
06810-5113
(Address of principal executive offices)
 
(Zip Code)
(203) 837-2000
(Registrant’s telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes  ý    No  ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes  ¨    No  ý
At September 30, 2014, 291,372,541 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
 
 
Quarter Ended September 30,
 
2014
 
2013
SALES
$
3,144

 
$
3,013

Cost of sales, exclusive of depreciation and amortization
1,780

 
1,697

Selling, general and administrative
327

 
336

Depreciation and amortization
301

 
281

Research and development
25

 
24

Venezuela currency devaluation and other charges

 
9

Other income (expense) - net

 
4

OPERATING PROFIT
711

 
670

Interest expense - net
45

 
41

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
666

 
629

Income taxes
187

 
175

INCOME BEFORE EQUITY INVESTMENTS
479

 
454

Income from equity investments
11

 
8

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
490

 
462

Less: noncontrolling interests
(13
)
 
(17
)
NET INCOME - PRAXAIR, INC.
$
477

 
$
445

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.63

 
$
1.51

Diluted earnings per share
$
1.62

 
$
1.49

Cash dividends per share
$
0.65

 
$
0.60

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
292,170

 
295,124

Diluted shares outstanding
295,239

 
298,357

The accompanying notes are an integral part of these financial statements.


3


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
 
 
Nine Months Ended September 30,
 
2014
 
2013
SALES
$
9,283

 
$
8,915

Cost of sales, exclusive of depreciation and amortization
5,273

 
5,045

Selling, general and administrative
988

 
1,017

Depreciation and amortization
879

 
822

Research and development
72

 
72

Venezuela currency devaluation and other charges

 
32

Other income (expense) - net
12

 
8

OPERATING PROFIT
2,083

 
1,935

Interest expense - net
134

 
122

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
1,949

 
1,813

Income taxes
546

 
513

INCOME BEFORE EQUITY INVESTMENTS
1,403

 
1,300

Income from equity investments
30

 
29

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
1,433

 
1,329

Less: noncontrolling interests
(41
)
 
(48
)
NET INCOME - PRAXAIR, INC.
$
1,392

 
$
1,281

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
4.75

 
$
4.33

Diluted earnings per share
$
4.70

 
$
4.28

Cash dividends per share
$
1.95

 
$
1.80

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
293,103

 
295,799

Diluted shares outstanding
296,240

 
299,077

The accompanying notes are an integral part of these financial statements.


4


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended September 30,
 
2014
 
2013
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
490

 
$
462

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(604
)
 
77

Income taxes
(5
)
 

Translation adjustments
(609
)
 
77

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
18

 
5

Reclassifications to net income
12

 
31

Income taxes
(9
)
 
(13
)
Funded status - retirement obligations
21

 
23

Derivative instruments (Note 6):
 
 
 
Current quarter unrealized gain (loss)

 
1

Derivative instruments

 
1

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(588
)
 
101

 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
(98
)
 
563

Less: noncontrolling interests
7

 
(23
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
(91
)
 
$
540

The accompanying notes are an integral part of these financial statements.


5


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
 
 
Nine Months Ended September 30,
 
2014
 
2013
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
1,433

 
$
1,329

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
 Foreign currency translation adjustments
(460
)
 
(354
)
 Reclassifications to net income
(3
)
 

 Income taxes
(20
)
 
19

Translation adjustments
(483
)
 
(335
)
Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
2

 
(4
)
Reclassifications to net income
39

 
76

Income taxes
(13
)
 
(23
)
Funded status - retirement obligations
28

 
49

Derivative instruments (Note 6):
 
 
 
Current period unrealized gain
3

 
1

Income taxes
(1
)
 

Derivative instruments
2

 
1

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(453
)
 
(285
)
 
 
 
 
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)
980

 
1,044

Less: noncontrolling interests
(18
)
 
(40
)
COMPREHENSIVE INCOME - PRAXAIR, INC.
$
962

 
$
1,004

The accompanying notes are an integral part of these financial statements.


6


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
September 30, 2014
 
December 31, 2013
ASSETS
 
 
 
Cash and cash equivalents
$
168

 
$
138

Accounts receivable - net
1,959

 
1,892

Inventories
545

 
506

Prepaid and other current assets
386

 
380

TOTAL CURRENT ASSETS
3,058

 
2,916

Property, plant and equipment (less accumulated depreciation of $12,049 in 2014 and $11,753 in 2013)
12,268

 
12,278

Goodwill
3,189

 
3,194

Other intangible assets - net
610

 
596

Other long-term assets
1,259

 
1,271

TOTAL ASSETS
$
20,384

 
$
20,255

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
864

 
$
921

Short-term debt
619

 
782

Current portion of long-term debt
413

 
3

Other current liabilities
1,064

 
958

TOTAL CURRENT LIABILITIES
2,960

 
2,664

Long-term debt
8,089

 
8,026

Other long-term liabilities
2,205

 
2,255

TOTAL LIABILITIES
13,254

 
12,945

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests
190

 
307

Praxair, Inc. Shareholders’ Equity:
 
 
 
Common stock $0.01 par value, authorized - 800,000,000 shares, issued - 383,230,625 shares for both periods
4

 
4

Additional paid-in capital
3,981

 
3,970

Retained earnings
11,348

 
10,528

Accumulated other comprehensive income (loss)
(2,411
)
 
(1,981
)
Treasury stock, at cost (2014 - 91,858,084 shares and 2013 - 89,096,761 shares)
(6,370
)
 
(5,912
)
Total Praxair, Inc. Shareholders’ Equity
6,552

 
6,609

Noncontrolling interests
388

 
394

TOTAL EQUITY
6,940

 
7,003

TOTAL LIABILITIES AND EQUITY
$
20,384

 
$
20,255

The accompanying notes are an integral part of these financial statements.


7


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
 
 
Nine Months Ended September 30,
 
2014
 
2013
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
1,392

 
$
1,281

Noncontrolling interests
41

 
48

Net income (including noncontrolling interests)
1,433

 
1,329

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Venezuela currency devaluation

 
23

Depreciation and amortization
879

 
822

Deferred income taxes
(32
)
 
88

Share-based compensation
42

 
52

Working capital:
 
 
 
Accounts receivable
(144
)
 
(139
)
Inventory
(52
)
 
(63
)
Prepaid and other current assets
18

 
(54
)
Payables and accruals
(3
)
 
18

Pension contributions
(14
)
 
(48
)
Long-term assets, liabilities and other
(31
)
 
(75
)
Net cash provided by operating activities
2,096

 
1,953

INVESTING
 
 
 
Capital expenditures
(1,207
)
 
(1,504
)
Acquisitions, net of cash acquired
(191
)
 
(1,311
)
Divestitures and asset sales
86

 
65

Net cash used for investing activities
(1,312
)
 
(2,750
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
(161
)
 
504

Long-term debt borrowings
867

 
2,105

Long-term debt repayments
(312
)
 
(939
)
Issuances of common stock
85

 
108

Purchases of common stock
(562
)
 
(458
)
Cash dividends - Praxair, Inc. shareholders
(570
)
 
(531
)
Excess tax benefit on share-based compensation
28

 
31

Noncontrolling interest transactions and other
(123
)
 
(24
)
Net cash (used for) provided by financing activities
(748
)
 
796

Effect of exchange rate changes on cash and cash equivalents
(6
)
 
(22
)
Change in cash and cash equivalents
30

 
(23
)
Cash and cash equivalents, beginning-of-period
138

 
157

Cash and cash equivalents, end-of-period
$
168

 
$
134

The accompanying notes are an integral part of these financial statements.

8


INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements - Praxair, Inc. and Subsidiaries (Unaudited)
 


9


PRAXAIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Presentation of Condensed Consolidated Financial Statements - In the opinion of Praxair, Inc. (Praxair) management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented and such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements of Praxair, Inc. and subsidiaries in Praxair’s 2013 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2014.
Inventories - Effective July 1, 2014, the Company changed its method of accounting for all remaining operations that were using the last-in, first-out (“LIFO”) method to the average-cost method. This change only impacted approximately 6% of Praxair's inventories which were accounted for under the LIFO method. See Note 4.
Accounting Standards Implemented in 2014
The following standards were effective for Praxair in 2014 and their adoption did not have a significant impact on the condensed consolidated financial statements:
Accounting for Cumulative Translation Adjustment – In March 2013, the Financial Accounting Standards Board ("FASB") issued updated guidance on the release of the cumulative translation adjustment into net income when a parent either sells a part or all of its investment in a foreign entity, or as a result of acquisitions achieved in stages. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.
Presentation of Unrecognized Tax Benefits – In July 2013, the FASB issued updated guidance on the presentation of unrecognized tax benefits. The new guidance requires an entity to present certain unrecognized tax benefits, or a portion thereof, as a reduction to the related deferred tax asset, primarily for loss and tax credit carryforwards. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.
Accounting Standards to be Implemented
Reporting Discontinued Operations – In April 2014, the FASB issued updated guidance on the reporting and disclosures of discontinued operations. The new guidance requires that the disposal of a component of an entity be reported as discontinued operations only if the action represents a strategic shift that will have a major effect on an entity’s operations and financial results, and would require expanded disclosures. This guidance will be effective for Praxair beginning in the first quarter of 2015, with early adoption optional.
Revenue Recognition – In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue. The new guidance requires the evaluation of contracts with customers to determine the recognition of revenue when or as the entity satisfies a performance obligation, and would require expanded disclosures. This guidance will be effective for Praxair beginning in the first quarter 2017 and includes several transition options. Praxair is in the early stages of reviewing the new guidance and will provide updates on the expected impact to Praxair in future filings, as determined.
Accounting for Share-based Compensation - In June 2014, the FASB issued updated guidance on the accounting for share-based payments when the terms of an award provide that a performance target could be achieved after the requisite service period. Praxair does not expect this requirement to have a significant impact on the consolidated financial statements. This guidance will be effective for Praxair beginning in the first quarter 2016, with early adoption optional.

Reclassifications – Certain prior years’ amounts have been reclassified to conform to the current year’s presentation.
2. 2013 Venezuela Currency Devaluation and Other Charges
Venezuela Currency Devaluation
On February 8, 2013, Venezuela announced a devaluation of the Venezuelan Bolivar from 4.30 to 6.30 (a 32% devaluation), effective on February 13, 2013. In the first quarter 2013 Praxair recorded a $23 million pre-tax charge ($23 million after-tax

10


or $0.08 per diluted share) due primarily to the remeasurement of the local Venezuelan balance sheet to reflect the new official 6.30 exchange rate.
Pension Settlement Charge
In 2012 a number of senior managers retired. These retirees are covered by the U.S. supplemental pension plan which provides for a lump sum benefit payment option. Under certain circumstances, such lump sum payments must be accounted for as a settlement of the related pension obligation, but only when paid. Accordingly, Praxair recorded a settlement charge related to net unrecognized actuarial losses of $9 million ($6 million after-tax) in the third quarter 2013, when the cash payments were made to the retirees.
3. Acquisitions
2014 Acquisitions

During the nine months ended September 30, 2014 Praxair had acquisitions totaling $191 million. These consisted primarily of an industrial gases business in Italy and packaged gases businesses in North and South America. These transactions resulted in goodwill and other intangible assets of $71 million and $53 million, respectively (see Note 9). The allocation of the purchase price is based on preliminary estimates and assumptions, and are subject to revision based on final information received, including appraisals and other analyses that support the underlying estimates. Adjustments, if any, are not expected to be material.

2013 Acquisitions

NuCO2 
On March 1, 2013 Praxair acquired 100% of NuCO2 Inc. ("NuCO2") for $1,095 million. NuCO2 is the leading national provider of beverage carbonation solutions in the United States to the restaurant and hospitality industries with 162,000 customer locations and 900 employees, and with 2012 sales of approximately $230 million. The NuCO2 micro-bulk beverage carbonation solution is the service model of choice for quick service restaurants and convenience stores offering fountain beverages and represents an extension of Praxair's core industrial gas business.
The acquisition of NuCO2 was accounted for as a business combination. Following the acquisition date, 100% of NuCO2's results were consolidated in the North America business segment. For the quarters ended March 31, 2014 and 2013, Praxair's consolidated income statement includes sales of $63 million and $20 million, respectively, related to NuCO2. Pro forma results for 2013 have not been included as the impact of the acquisition is not material to the consolidated statements of income.
The following table summarizes the fair value of identifiable assets acquired and liabilities assumed in the acquisition of NuCO2 as of the acquisition date. Purchase accounting has been finalized and adjustments made subsequent to the acquisition date were not significant.
(Millions of dollars)
 
March 1, 2013
Trade receivables, net
 
$
17

Property, plant and equipment
 
199

Intangible assets
 
374

Deferred income taxes
 
(85
)
Other assets and (liabilities)
 
(28
)
Goodwill
 
618

Purchase price
 
$
1,095

 
The identifiable intangible assets primarily consist of customer relationships that will be amortized over their estimated useful life of 25 years. The deferred income taxes relate primarily to property, plant and equipment, intangibles and operating loss carryforwards. The goodwill resulting from the acquisition is attributable to (i) expected growth from market penetration into the quick service restaurants, convenience stores and themed restaurant chains in the United States and select international markets as we leverage Praxair's customer and distribution networks worldwide, and (ii) cost synergies related to the procurement of raw materials, distribution-related expenses and administrative costs as we integrate and rationalize administration tasks and leverage Praxair's purchasing scale. The goodwill is not deductible for income tax purposes.




11


Other Acquisitions

On May 29, 2013 Praxair acquired Dominion Technology Gases (“Dominion”), a leading global supplier of diving, welding, industrial, laboratory and calibration gases and associated equipment to the offshore oil and gas industry based in Aberdeen, Scotland. Dominion provides products and services to the expanding global offshore oil and gas market.

On June 3, 2013 Praxair acquired Volgograd Oxygen Factory (“VOF”), the largest independent industrial gas business in southern Russia, expanding Praxair's production and distribution capabilities in the Volgograd region. Additionally, Praxair acquired several smaller independent package gas distributors in the United States and a customer contract with operating assets in China.

The results of operations of these acquisitions were consolidated from the respective acquisition dates, primarily in the Europe business segment and the impact was not significant. The aggregate purchase price for these acquisitions was $216 million and resulted in the recognition of $186 million of intangible assets, including $99 million of goodwill and $87 million relating to other intangible assets, which will be amortized over their estimated useful life.

4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
September 30,
2014
 
December 31,
2013
Inventories *
 
 
 
Raw materials and supplies
$
176

 
$
167

Work in process
61

 
58

Finished goods
308

 
281

Total inventories
$
545

 
$
506


* Effective July 1, 2014, Praxair changed its method of accounting for all remaining operations that were using the last-in, first-out (“LIFO”) method to the average-cost method, primarily raw materials. This change only impacted approximately 6% of consolidated inventories which were accounted for under the LIFO method. Praxair applied this change as a cumulative effect adjustment in the third quarter 2014 and did not restate prior periods because the impact was not material. The accounting change increased inventories by $9 million at September 30, 2014, and decreased cost of sales, exclusive of depreciation and amortization $9 million ($6 million after-tax) for both the quarter and nine-month periods ended September 30, 2014. The Company believes the change is preferable because it will better reflect the impact of current costs in both the consolidated balance sheets and consolidated statements of income, is comparable accounting to the peer group and is aligned with Praxair's inventory management.

Long-term receivables
Long-term receivables are not material and are largely reserved. Such long-term receivables are included within other long-term assets in the condensed consolidated balance sheets and totaled $47 million and $36 million at September 30, 2014 and December 31, 2013, respectively. These amounts are net of reserves of $52 million and $51 million, respectively. The amounts in both periods relate primarily to government receivables in Brazil and other long-term notes receivable from customers. Collectability is reviewed regularly and uncollectible amounts are written-off as appropriate. The account balance changes during 2014 were primarily the result of additional receivables, net of reserves.


12


5. Debt
The following is a summary of Praxair’s outstanding debt at September 30, 2014 and December 31, 2013:
(Millions of dollars)
September 30,
2014
 
December 31,
2013
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
565

 
$
712

Other bank borrowings (primarily international)
54

 
70

Total short-term debt
619

 
782

LONG-TERM
 
 
 
U.S. borrowings (U.S. dollar denominated unless otherwise noted)
 
 
 
4.375% Notes due 2014 (a)

 
300

4.625% Notes due 2015 (b)
500

 
500

3.25% Notes due 2015 (c, d)
411

 
418

0.75% Notes due 2016
400

 
400

5.375% Notes due 2016
400

 
400

5.20% Notes due 2017
325

 
325

1.05% Notes due 2017
400

 
400

1.20% Notes due 2018
500

 
500

1.25% Notes due 2018 (c, d)
478

 
478

4.50% Notes due 2019 (c)
598

 
598

1.90% Notes due 2019
500

 
500

1.50% Euro-denominated notes due 2020 (c, e)
754

 

4.05% Notes due 2021 (c)
498

 
498

3.00% Notes due 2021 (c)
497

 
497

2.45% Notes due 2022 (c)
598

 
598

2.20% Notes due 2022 (c)
499

 
499

2.70% Notes due 2023 (c)
499

 
498

3.55% Notes due 2042 (c)
466

 
466

Other
5

 
5

International bank borrowings (b)
166

 
140

Obligations under capital leases
8

 
9

 
8,502

 
8,029

Less: current portion of long-term debt
(413
)
 
(3
)
Total long-term debt
8,089

 
8,026

Total debt
$
9,121

 
$
8,811

 
(a)
In March 2014, Praxair repaid $300 million of 4.375% notes that became due.
(b)
Classified as long-term because of the company’s intent to refinance this debt on a long-term basis and the availability of such financing under the terms of an existing $2 billion long-term credit facility.
(c)
Amounts are net of unamortized discounts.
(d)
September 30, 2014 and December 31, 2013 include a $14 million and $22 million fair value increase, respectively, related to hedge accounting. See Note 6 for additional information.
(e)
During March 2014, Praxair issued €600 million 1.50% Euro-denominated notes due 2020. This debt issuance has been designated as a hedge of the net investment position in European operations where the Euro is the functional currency (see Note 6). The proceeds of this debt issuance were used for general corporate purposes, including acquisitions, repayment of debt and share repurchases under the company's share repurchase program.

13


6. Financial Instruments
In its normal operations, Praxair is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Praxair is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Praxair routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Praxair only uses commonly traded and non-leveraged instruments.
There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.
Counterparties to Praxair’s derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at September 30, 2014 and December 31, 2013 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,269

 
$
2,197

 
$
4

 
$
4

 
$
34

 
$
14

Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Forecasted purchases (a)
$

 
$
5

 
$

 
$

 
$

 
$

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (b)
875

 
875

 
14

 
22

 

 

Total
$
875

 
$
880

 
$
14

 
$
22

 
$

 
$

Total Derivatives
$
3,144

 
$
3,077

 
$
18

 
$
26

 
$
34

 
$
14

 
(a)
Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities.
(b)
Assets are recorded in other current and other long term assets
Currency Contracts
Balance Sheet Items
Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. The fair value adjustments on these contracts are offset by the fair value adjustments recorded on the hedged assets and liabilities.

14


Forecasted Purchases
Foreign currency contracts related to forecasted purchases consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on forecasted purchases of capital-related equipment and services denominated in currencies other than the functional currency of the related operating units. These forward contracts were designated and accounted for as cash flow hedges.
Net Investment Hedge

Praxair has designated the €600 million ($754 million as of September 30, 2014) 1.50% Euro-denominated notes due 2020, as a hedge of the net investment position in its European operations. This Euro-denominated debt instrument reduces the company's exposure to changes in the currency exchange rate on investments in foreign subsidiaries with Euro functional currencies. Since the time the Euro-denominated notes were issued in March 2014 through September 30, 2014, exchange rate movements have reduced long-term debt by $74 million, with the offsetting gain shown within the cumulative translation component of AOCI in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income.
Interest Rate Contracts
Outstanding Interest Rate Swaps
At September 30, 2014, Praxair had $875 million notional amount of interest-rate swap agreements outstanding related to the $400 million 3.25% fixed-rate notes that mature in 2015 and to the $475 million 1.25% notes that mature 2018, which effectively convert fixed-rate interest to variable-rate interest. These swap agreements were designated as fair value hedges with the resulting fair value adjustments recognized in earnings along with an equally offsetting charge / benefit to earnings for the changes in the fair value of the underlying debt instrument. At September 30, 2014, $14 million was recognized as an increase in the fair value of these notes ($22 million at December 31, 2013).
Terminated Interest Rate Swap
During 2010, Praxair entered into a $500 million notional amount of interest-rate swap agreement that effectively converted fixed-rate interest to variable-rate interest on the $500 million 2.125% notes that matured in June 2013. This swap agreement was terminated in 2011, and Praxair received a $18 million cash payment. This $18 million gain was recognized in earnings as a reduction to interest expense over the remaining term of the underlying debt. Accordingly, during the nine months ended September 30, 2013, $4 million was recognized as a reduction to interest expense. No other periods presented herein were impacted.
Terminated Treasury Rate Locks
The following table summarizes the unrecognized gains (losses) related to terminated treasury rate lock contracts:
 
Year
Terminated
 
Original
Gain /
(Loss)
 
Unrecognized Gain / (Loss) (a)
(Millions of dollars)
September 30,
2014
 
December 31,
2013
Treasury Rate Locks
 
 
 
 
 
 
 
Underlying debt instrument:
 
 
 
 
 
 
 
$500 million 2.20% fixed-rate notes that mature in 2022 (b)
2012
 
$
(2
)
 
$
(1
)
 
$
(2
)
$500 million 3.00% fixed-rate notes that mature in 2021 (b)
2011
 
(11
)
 
(8
)
 
(9
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
8

 
10

$500 million 4.625% fixed-rate notes that mature in 2015 (b)
2008
 
(7
)
 

 
(1
)
Total - pre-tax
 
 
 
 
$
(1
)
 
$
(2
)
Less: income taxes
 
 
 
 

 
1

After- tax amounts
 
 
 
 
$
(1
)
 
$
(1
)
 
(a)
The unrecognized gains / (losses) for the treasury rate locks are shown in accumulated other comprehensive income (“AOCI”) and are being recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements. Refer to the table below summarizing the impact on the company’s consolidated statements of income and AOCI for current period gain (loss) recognition.
(b)
The notional amount of the treasury rate lock contracts are equal to the underlying debt instrument with the exception of the treasury rate lock contract entered into to hedge the $600 million 4.50% fixed-rate notes that mature in 2019. The notional amount of this contract was $500 million.


15


The following tables summarize the impacts of the company’s derivatives on the consolidated statements of income and AOCI:
 
Amount of Pre-Tax Gain (Loss)
Recognized in Earnings *
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2014
 
2013
 
2014
 
2013
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
 
 
 
 
 
 
 
Debt-related
$
(45
)
 
$
(4
)
 
$
(16
)
 
$
(10
)
Other balance sheet items
(5
)
 
1

 
(1
)
 
(9
)
Total
$
(50
)
 
$
(3
)
 
$
(17
)
 
$
(19
)
* The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. Accordingly, the gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are recorded in the consolidated statements of income as other income (expenses)-net.

Derivatives Designated as Hedging Instruments **
 
Quarter Ended
 
Amount of Gain  (Loss)
Recognized in AOCI
 
Amount of Gain  (Loss)
Reclassified from AOCI to the Consolidated Statement of
Income
(Millions of dollars)
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Currency contracts:
 
 
 
 
 
 
 
Forecasted purchases
$

 
$
1

 
$

 
$

 
Nine Months Ended
 
Amount of Gain  (Loss)
Recognized in AOCI
 
Amount of Gain  (Loss)
Reclassified from AOCI to the Consolidated Statement of
Income
(Millions of dollars)
September 30,
2014
 
September 30,
2013
 
September 30,
2014
 
September 30,
2013
Currency contracts:
 
 
 
 
 
 
 
Net investment hedge
$
(6
)
 
$

 
$

 
$

Forecasted purchases
$

 
$
1

 
$

 
$

Total - pre tax
$
(6
)
 
$
1

 
$

 
$

Less: income taxes
2

 

 

 

Total - Net of Taxes
$
(4
)
 
$
1

 
$

 
$

**The gains (losses) on net investment hedges are recorded as a component of AOCI within foreign currency translation adjustments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on forecasted purchases and treasury rate locks are recorded as a component of AOCI within derivative instruments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. There was no ineffectiveness for these instruments during 2014 or 2013. The gains (losses) on net investment hedges are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt. Net losses of less than $1 million are expected to be reclassified to earnings during the next twelve months.

7. Fair Value Disclosures
The fair value hierarchy prioritizes the input to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)


16


Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis:
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
 
September 30,
2014
 
December 31,
2013
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
18

 
$
26

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
34

 
$
14

 

 

The fair values of the derivative assets and liabilities are based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. Investments are marketable securities traded on an exchange.
The fair values of cash and cash equivalents, short-term debt, accounts receivable-net, and accounts payable approximate carrying amounts because of the short maturities of these instruments. The fair value of long-term debt is estimated based on the quoted market prices for similar issues, which is deemed a level 2 measurement. At September 30, 2014, the estimated fair value of Praxair’s long-term debt portfolio was $8,603 million versus a carrying value of $8,502 million. At December 31, 2013, the estimated fair value of Praxair’s long-term debt portfolio was $7,976 million versus a carrying value of $8,029 million. Differences from carrying amounts are attributable to interest-rate changes subsequent to when the debt was issued.

8. Earnings Per Share – Praxair, Inc. Shareholders
Basic earnings per share is computed by dividing Net income – Praxair, Inc. for the period by the weighted average number of Praxair common shares outstanding. Diluted earnings per share is computed by dividing Net income – Praxair, Inc. for the period by the weighted average number of Praxair common shares outstanding and dilutive common stock equivalents, as follows:
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
2014
 
2013
 
2014
 
2013
Numerator (Millions of dollars)
 
 
 
 
 
 
 
Net income - Praxair, Inc.
$
477

 
$
445

 
$
1,392

 
$
1,281

Denominator (Thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding
291,664

 
294,595

 
292,597

 
295,271

Shares earned and issuable under compensation plans
506

 
529

 
506

 
528

Weighted average shares used in basic earnings per share
292,170

 
295,124

 
293,103

 
295,799

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options and awards
3,069

 
3,233

 
3,137

 
3,278

Weighted average shares used in diluted earnings per share
295,239

 
298,357

 
296,240

 
299,077

Basic Earnings Per Share
$
1.63

 
$
1.51

 
$
4.75

 
$
4.33

Diluted Earnings Per Share
$
1.62

 
$
1.49

 
$
4.70

 
$
4.28

There were no antidilutive stock options for the quarter and nine months ended September 30, 2014. There were no antidilutive shares for the quarter ended September 30, 2013. Stock options of 780 were antidilutive and therefore excluded in the computation of diluted earnings per share for nine months ended September 30, 2013.

17


9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 2014 were as follows:
(Millions of dollars)
North
America
 
South
America
 
Europe
 
Asia
 
Surface
Technologies
 
Total
Balance, December 31, 2013
$
2,117

 
$
166

 
$
743

 
$
24

 
$
144

 
$
3,194

Acquisitions (Note 3)
46

 
4

 
17

 

 
4

 
71

Purchase adjustments & other

 

 
(6
)
 

 
5

 
(1
)
Foreign currency translation
(11
)
 
(9
)
 
(50
)
 

 
(5
)
 
(75
)
Balance, September 30, 2014
$
2,152

 
$
161

 
$
704

 
$
24

 
$
148

 
$
3,189

Praxair has performed its goodwill impairment tests annually during the second quarter of each year, and historically has determined that the fair value of each of its reporting units was substantially in excess of its carrying value. For the 2014 test completed last quarter, Praxair applied the FASB's updated accounting guidance (refer to Note 1 to the consolidated financial statements of Praxair's 2013 Annual Report on Form 10-K) which allows the Company to first assess qualitative factors to determine the extent of additional quantitative analysis, if any, that may be required to test goodwill for impairment. Based on the qualitative assessments performed, Praxair concluded that it was more likely than not that the fair value of each reporting unit substantially exceeded its carrying value and therefore, further quantitative analysis was not required. As a result, no impairment was recorded. There were no indicators of impairment through September 30, 2014.
Changes in the carrying amounts of other intangibles for the nine months ended September 30, 2014 were as follows:
(Millions of dollars)
Customer &
License/Use
Agreements
 
Non-compete
Agreements
 
Patents &
Other
 
Total
Cost:
 
 
 
 
 
 
 
Balance, December 31, 2013
$
661

 
$
31

 
$
43

 
$
735

Additions (Note 3)
42

 
11

 

 
53

Foreign currency translation
(10
)
 

 

 
(10
)
Other *

 
(5
)
 
4

 
(1
)
Balance, September 30, 2014
$
693

 
$
37

 
$
47

 
$
777

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2013
$
(118
)
 
$
(16
)
 
$
(5
)
 
$
(139
)
Amortization expense
(27
)
 
(5
)
 
(3
)
 
(35
)
Foreign currency translation
3

 

 

 
3

Other *

 
4

 

 
4

Balance, September 30, 2014
$
(142
)
 
$
(17
)
 
$
(8
)
 
$
(167
)
Net balance at September 30, 2014
$
551

 
$
20

 
$
39

 
$
610

* Other primarily relates to the write-off of fully amortized assets and purchase accounting adjustments.
There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible assets is approximately 18 years.
Total estimated annual amortization expense is as follows:
(Millions of dollars)
 
Remaining 2014
$
16

2015
48

2016
47

2017
39

2018
35

Thereafter
425

 
$
610


18


10. Share-Based Compensation
Share-based compensation of $14 million ($10 million after-tax) and $18 million ($12 million after-tax) was recognized during the quarters ended September 30, 2014 and 2013, respectively. Share-based compensation of $42 million ($29 million after-tax) and $52 million ($35 million after-tax) was recognized for the nine months ended September 30, 2014 and 2013, respectively. The expense was recorded primarily in selling, general and administrative expenses. There was no share-based compensation cost that was capitalized. For further details regarding Praxair’s share-based compensation arrangements and prior-year grants, refer to Note 15 to the consolidated financial statements of Praxair’s 2013 Annual Report on Form 10-K.
Stock Options
The weighted-average fair value of options granted during the nine months ended September 30, 2014 was $14.62 ($16.31 in 2013) based on the Black-Scholes Options-Pricing model. The decrease in grant date fair value year-over-year is primarily attributable to the decrease in volatility which was partially offset by increases in Praxair's stock price and risk-free interest rate.

The following weighted-average assumptions were used to value the grants in 2014 and 2013 :
 
Nine Months Ended September 30,
 
2014
 
2013
Dividend yield
2.0
%
 
2.2
%
Volatility
15.2
%
 
21.7
%
Risk-free interest rate
1.57
%
 
0.76
%
Expected term years
5

 
5

The following table summarizes option activity under the plans as of September 30, 2014 and changes during the nine-month period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):
 
Number of
Options  (000’s)
 
Average
Exercise Price
 
Average
Remaining
Life
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2014
11,161

 
$
81.42

 
 
 
 
Granted
1,293

 
128.80

 
 
 
 
Exercised
(1,150
)
 
63.14

 
 
 
 
Cancelled or Expired
(83
)
 
109.81

 
 
 
 
Outstanding at September 30, 2014
11,221

 
88.54

 
5.5
 
$
454

Exercisable at September 30, 2014
8,630

 
$
79.33

 
4.5
 
$
429

The aggregate intrinsic value represents the difference between the company’s closing stock price of $129.00 as of September 30, 2014 and the exercise price multiplied by the number of options outstanding as of that date. The total intrinsic value of stock options exercised during the quarter and nine months ended September 30, 2014 was $14 million and $78 million, respectively ($25 million and $93 million during the same time periods in 2013, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and nine months ended September 30, 2014 was $12 million and $73 million ($29 million and $96 million for the same time period in 2013). The cash tax benefit realized from share-based compensation totaled $5 million and $44 million for the quarter and nine months ended September 30, 2014, of which $28 million in excess tax benefits was classified as financing cash flows for the nine months ended September 30, 2014 ($9 million and $44 million cash tax benefit for the same periods in 2013 of which $31 million represented excess tax benefit for the nine months ended September 30, 2013).
As of September 30, 2014, $23 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1.0 year .
Performance-Based and Restricted Stock Awards
During the nine months ended September 30, 2014, the company granted performance-based stock units to employees which vest principally based on the third anniversary of their grant date. The actual number of shares issued in settlement of a vested award can range from zero to 200 percent of the target number of shares granted based upon the company’s attainment of specified performance targets at the end of a three-year period. Compensation expense related to these awards is recognized over the three-year performance period based on the fair value of the closing market price of the company’s common stock on

19


the date of the grant and the estimated performance that will be achieved. Compensation expense will be adjusted during the three-year performance period based upon the estimated performance levels that will be achieved.
During the nine months ended September 30, 2014, the company also granted restricted stock units to employees. The majority of the restricted stock units vest at the end of a three-year service period. Compensation expense related to the restricted stock units is recognized on a straight-line basis over the vesting period.
The weighted-average fair value of performance-based stock and restricted stock units granted during the nine months ended September 30, 2014 was $121.16 and $122.73, respectively, ($103.46 and $105.53 for the same period in 2013). This is based on the closing market price of Praxair’s common stock on the grant date adjusted for dividends that will not be paid during the vesting period.
The following table summarizes non-vested performance-based and restricted stock award activity as of September 30, 2014 and changes during the nine months then ended (shares based on target amounts, averages are calculated on a weighted basis):
 
Performance-Based
 
Restricted Stock
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
Non-vested at January 1, 2014
867

 
$
99.55

 
337

 
$
100.41

Granted*
328

 
121.16

 
90

 
122.73

Vested*
(338
)
 
92.06

 
(107
)
 
95.80

Cancelled
(21
)
 
110.21

 
(14
)
 
103.64

Non-vested at September 30, 2014
836

 
$
109.10

 
306

 
$
108.41


* Amounts for performance-based awards include 49 thousand shares which represent actual shares vested in 2014 in excess of original targeted amounts for 2011 grants.
As of September 30, 2014, based on current estimates of future performance, $45 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2017 and $17 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2017.
11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and nine months ended September 30, 2014 and 2013 are shown below:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
Pensions
 
OPEB
 
Pensions
 
OPEB
(Millions of dollars)
2014
 
2013
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Service cost
$
13

 
$
14

 
$
1

 
$
1

 
$
39

 
$
42

 
$
3

 
$
3

Interest cost
31

 
28

 
3

 
3

 
93

 
86

 
9

 
9

Expected return on plan assets
(40
)
 
(38
)
 

 

 
(120
)
 
(114
)
 

 

Net amortization and deferral
15

 
23

 
(3
)
 
(1
)
 
46

 
70

 
(7
)
 
(3
)
Net periodic benefit cost before pension settlement charge
19

 
27

 
1

 
3

 
58

 
84

 
5

 
9

Pension settlement charge (Note 2)

 
9

 

 

 

 
9

 

 

Net periodic benefit cost
$
19

 
$
36

 
$
1

 
$
3

 
$
58

 
$
93

 
$
5

 
$
9

Praxair estimates that 2014 contributions to its pension plans will be in the area of $20 million, of which $14 million have been made through September 30, 2014.

20


12. Commitments and Contingencies
Contingent Liabilities
Praxair is subject to various lawsuits and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Praxair has strong defenses in these cases and intends to defend itself vigorously. It is possible that the company may incur losses in connection with some of these actions in excess of accrued liabilities. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the company’s reported results of operations in any given period (see Note 17 to the consolidated financial statements of Praxair’s 2013 Annual Report on Form 10-K).
Significant matters are:
During May 2009, the Brazilian government published Law 11941/2009 instituting a new voluntary amnesty program (“Refis Program”) which allowed Brazilian companies to settle certain federal tax disputes at reduced amounts. During the 2009 third quarter, Praxair decided that it was economically beneficial to settle many of its outstanding federal tax disputes and such disputes were enrolled in the Refis Program, subject to final calculation and review by the Brazilian federal government. The Company recorded estimated liabilities based on the terms of the Refis Program. Since 2009, Praxair has been unable to reach final agreement on the calculations and recently initiated litigation against the government in an attempt to resolve certain items. Open issues relate to the following matters: (i) application of cash deposits and net operating loss carryforwards to satisfy obligations, (ii) the amount of tax reductions available under the Refis Program, and (iii) income tax deductibility of payments. Although it is difficult to estimate the timing of resolution of legal matters in Brazil, it is possible that individual disputed matters may be resolved during the next year.
At September 30, 2014 the most significant non-income and income tax claims in Brazil, after enrollment in the Refis Program, relate to state VAT tax matters associated with procedural issues and a federal income tax matter where the taxing authorities are challenging the tax rate that should be applied to income generated by a subsidiary company. The total estimated exposure relating to such claims, including interest and penalties, as appropriate, is approximately $190 million. Praxair has not recorded any liabilities related to such claims based on management judgments, after considering judgments and opinions of outside counsel. Because litigation in Brazil historically takes many years to resolve, it is very difficult to estimate the timing of resolution of these matters; however, it is possible that certain of these matters may be resolved within the near term. The company is vigorously defending against the proceedings.
On September 1, 2010, CADE (Brazilian Administrative Council for Economic Defense) announced alleged anticompetitive activity on the part of five industrial gas companies in Brazil and imposed fines on all five companies. Originally, CADE imposed a civil fine of R$2.2 billion Brazilian reais (US$898 million) against White Martins, the Brazil-based subsidiary of Praxair, Inc. In response to a motion for clarification, the fine was reduced to R$1.7 billion Brazilian reais (US$694 million) due to a calculation error made by CADE. The amount of the fine is subject to indexation using SELIC. On September 2, 2010, Praxair issued a press release and filed a report on Form 8-K rejecting all claims and stating that the fine represents a gross and arbitrary disregard of Brazilian law.
On October 19, 2010, White Martins filed an annulment petition (“appeal”) with the Federal Court in Brasilia seeking to have the fine against White Martins entirely overturned. In order to suspend payment of the fine pending the completion of the appeal process, Brazilian law required that the company tender a form of guarantee in the amount of the fine as security. Currently, 50% of the guarantee is satisfied by letters of credit with a financial institution and 50% of the guarantee is satisfied by equity of a Brazilian subsidiary.
Praxair strongly believes that the allegations are without merit and that the fine will be entirely overturned during the appeal process. The company further believes that it has strong defenses and will vigorously defend against the allegations and related fine up to such levels of the Federal Courts in Brazil as may be necessary. Because appeals in Brazil historically take many years to resolve, it is very difficult to estimate when the appeal will be finally decided. Based on management judgments, after considering judgments and opinions of outside counsel, no reserve has been recorded for this proceeding as management does not believe that a loss is probable.

21




13. Segments
Sales and operating profit by segment for the quarters and nine months ended September 30, 2014 and 2013 are shown below. For a description of Praxair’s operating segments, refer to Note 18 to the consolidated financial statements of Praxair’s 2013 Annual Report on Form 10-K.
  
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2014
 
2013
 
2014
 
2013
SALES(a) 
 
 
 
 
 
 
 
North America
$
1,639

 
$
1,588

 
$
4,847

 
$
4,597

Europe
385

 
386

 
1,190

 
1,138

South America
523

 
494

 
1,520

 
1,561

Asia
426

 
385

 
1,212

 
1,131

Surface Technologies
171

 
160

 
514

 
488

Total sales
$
3,144

 
$
3,013

 
$
9,283

 
$
8,915

  
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2014
 
2013
 
2014
 
2013
OPERATING PROFIT
 
 
 
 
 
 
 
North America
$
416

 
$
406

 
$
1,192

 
$
1,145

Europe
71

 
64

 
228

 
195

South America
118

 
115

 
344

 
352

Asia
75

 
67

 
226

 
191

Surface Technologies
31

 
27

 
93

 
84

Segment operating profit
711

 
679

 
2,083

 
1,967

Venezuela currency devaluation (Note 2)

 
(9
)
 

 
(32
)
Total operating profit
$
711

 
$
670

 
$
2,083

 
$
1,935

 
(a)
Intersegment sales, primarily from North America to other segments, were not significant for the quarters and nine months ended September 30, 2014 and 2013.


22



14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters and nine months ended September 30, 2014 and 2013 is provided below:

Quarter Ended September 30,
(Millions of dollars)
2014
 
2013
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
6,911

 
$
395

 
$
7,306

 
$
5,928

 
$
357

 
$
6,285

Net income (a)
477

 
12

 
489

 
445

 
12

 
457

Other comprehensive income (loss)
(566
)
 
(16
)
 
(582
)
 
96

 
5

 
101

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions) (b)

 
4

 
4

 

 

 

Dividends and other capital changes

 
(7
)
 
(7
)
 

 
(9
)
 
(9
)
Redemption value adjustments

 

 

 
(27
)
 

 
(27
)
Dividends to Praxair, Inc. common stock holders ($0.65 per share in 2014 and $0.60 per share in 2013)
(189
)
 

 
(189
)
 
(176
)
 

 
(176
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
2

 

 
2

 
2

 

 
2

For employee savings and incentive plans
17

 

 
17

 
32

 

 
32

Purchases of common stock
(118
)
 

 
(118
)
 
(115
)
 

 
(115
)
Tax benefit from share-based compensation
4

 

 
4

 
7

 

 
7

Share-based compensation
14

 

 
14

 
18

 

 
18

Balance, end of period
$
6,552

 
$
388

 
$
6,940

 
$
6,210

 
$
365

 
$
6,575


23


 
Nine Months Ended September 30,
(Millions of dollars)
2014
 
2013
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
6,609

 
$
394

 
$
7,003

 
$
6,064

 
$
357

 
$
6,421

Net income (a)
1,392

 
32

 
1,424

 
1,281

 
31

 
1,312

Other comprehensive loss
(430
)
 
(17
)
 
(447
)
 
(287
)
 
2

 
(285
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions) (b)
(24
)
 
7

 
(17
)
 

 

 

Dividends and other capital changes

 
(28
)
 
(28
)
 

 
(25
)
 
(25
)
Redemption value adjustments
(1
)
 

 
(1
)
 
(40
)
 

 
(40
)
Dividends to Praxair, Inc. common stock holders ($1.95 per share in 2014 and $1.80 per share in 2013)
(570
)
 

 
(570
)
 
(531
)
 

 
(531
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
5

 

 
5

 
5

 

 
5

For employee savings and incentive plans
69

 

 
69

 
92

 

 
92

Purchases of common stock
(568
)
 

 
(568
)
 
(458
)
 

 
(458
)
Tax benefit from share-based compensation
28

 

 
28

 
32

 

 
32

Share-based compensation
42

 

 
42

 
52

 

 
52

Balance, end of period
$
6,552

 
$
388

 
$
6,940

 
$
6,210

 
$
365

 
$
6,575


(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $1 million and $9 million for the quarter and nine months ended September 30, 2014 ($5 million and $17 million for the same time periods in 2013, respectively), which is not part of total equity (see redeemable noncontrolling interests section below).
(b)
Praxair increased its ownership in certain consolidated subsidiaries. The difference between the purchase price and the related noncontrolling interests was recorded as a decrease in Praxair's additional paid-in-capital.
The components of AOCI are as follows:
 
September 30,
 
December 31,
(Millions of dollars)
2014
 
2013
Cumulative translation adjustment - net of taxes
 
 
 
North America
$
(514
)
 
$
(315
)
South America
(1,317
)
 
(1,179
)
Europe
(138
)
 
(63
)
Asia
(7
)
 
21

Surface Technologies
8

 
28

 
(1,968
)
 
(1,508
)
Derivatives - net of taxes
(2
)
 
(4
)
Pension / OPEB funded status obligation - net of taxes
(441
)
 
(469
)
 
$
(2,411
)
 
$
(1,981
)

24


Redeemable Noncontrolling Interests
Noncontrolling interests with redemption features, such as put/sell options, that are not solely within the Company’s control (“redeemable noncontrolling interests”) are reported separately in the consolidated balance sheets at the greater of carrying value or redemption value. For redeemable noncontrolling interests that are not yet exercisable, Praxair calculates the redemption value by accreting the carrying value to the redemption value over the period until exercisable. If the redemption value is greater than the carrying value, any increase is adjusted directly to equity and does not impact net income.
Redeemable noncontrolling interests include Yara Praxair, a joint venture in Scandinavia, and two packaged gas distributors in the United States where the noncontrolling interests have put options. In Scandinavia, the noncontrolling shareholder has the right to sell its shares to Praxair starting in 2015 for a period of 4 years at a formula price. Praxair also obtained the right to purchase the shares held by the noncontrolling shareholder starting in 2017 for a period of 2 years, also at a formula price.
The following is a summary of the changes in redeemable noncontrolling interests for the nine months ended September 30, 2014 and 2013: 
(Millions of dollars)
2014
 
2013
Balance, January 1,
$
307

 
$
252

Net income
9

 
17

Distributions to noncontrolling interest
(9
)
 
(9
)
Redemption value adjustments/accretion
1

 
40

Foreign currency translation and other
(6
)
 
(10
)
Purchase of noncontrolling interest *
(112
)
 

Balance, September 30,
$
190

 
$
290


* In January 2014, Praxair acquired the redeemable noncontrolling interests related to Praxair Distribution Mid-Atlantic, LLC. The cash payment is shown in the financing section of the condensed consolidated statements of cash flows under the caption "Noncontrolling interest transactions and other".

25


Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Consolidated Results

Praxair's sales in the third quarter were 4% above the prior year. Excluding negative currency translation effects which reduced overall sales by 1%, sales grew 5% due to volume growth and higher overall pricing. Volume growth of 3% was primarily driven by new project start-ups in North America and Asia. Reported operating profit was 6% above the prior year, and 5% when compared to adjusted 2013 results. Operating profit growth was driven by higher pricing, primarily in North and South America. Reported net income and diluted earnings per share ("EPS") grew 7% and 9%, respectively, versus 2013 results. When compared to the 2013 adjusted results, net income and EPS grew 6% and 7% respectively. EPS grew faster than net income due to a lower number of shares outstanding. Cash flow from operations was strong at $713 million, which was 23% of sales.

Sales grew 4% in the nine months ended September 30, 2014. Excluding negative currency translation effects which reduced overall sales by 2%, sales grew 6% due to volume growth, higher overall pricing and acquisitions. Volume growth in North America and Asia included new project start-ups. Reported operating profit of $2,083 million grew 8% from the prior-year, and 6% when compared to the adjusted 2013 results. Operating profit grew primarily from higher pricing. Net income and EPS grew 9% and 10%, respectively, versus 2013 results. When compared to the 2013 adjusted results, net income and EPS grew 6% and 7% respectively. EPS grew faster than net income due to a lower number of shares outstanding. Cash flow from operations was strong at $2,096 million, which was 23% of sales and 7% above the comparable period in 2013.
Outlook
Diluted earnings per share for the fourth quarter of 2014 are expected to be in the range of $1.53 to $1.60.
Diluted earnings per share for the full year of 2014 are expected to be in the range of $6.23 to $6.30.
During the fourth quarter, Praxair will offer certain former employees who participate in either of the two U.S. qualified defined pension plans, the option to receive a one-time lump sum payment of their vested pension benefits under the plans rather than receiving lifetime annuity payments of these benefits. Depending on the acceptance rate of the lump sum payment option, a settlement of the related pension obligation could be triggered. As a result a pre-tax pension settlement charge of up to $15 million could be required to be recorded during the fourth quarter. Any potential pension settlement charge is not included in the above earnings guidance.
For the full year of 2014, Praxair expects sales in the area of $12.3 to $12.4 billion. Full-year capital expenditures are expected to be about $1.7 billion.

The company’s core business is to build, own, and operate industrial gas plants in order to supply atmospheric and process gases to customers. As such, Praxair believes that its backlog is one indicator of future sales growth. At September 30, 2014, Praxair’s backlog of 25 large projects under construction was $1.9 billion. This represents the total estimated capital cost of large plants under construction. About a third of this project backlog is in North America and approximately a third is in Asia, which includes projects in China, India and Korea. The rest is in Europe and South America. These plants will supply customers in the energy, chemical, manufacturing, electronics and metals markets.
Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via quarterly earnings releases and investor teleconferences. These updates are available on the company’s website, www.praxair.com, but are not incorporated herein.


26


The following table provides summary data for the quarters and nine months ended September 30, 2014 and 2013:
  
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Dollar amounts in millions, except per share data)