10-Q 1 px-q1201510q.htm PRAXAIR, INC. 2015 FIRST QUARTER FORM 10-Q PX-Q1 2015 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 March 31, 2015
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 March 31, 2015, 288,310,190 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries March 31, 2015 and December 31, 2014 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries Three Months Ended March 31, 2015 and 2014 (Unaudited)
 
 
 
 
 
 
 
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 March 31,
 
2015
 
2014
SALES
$
2,757

 
$
3,026

Cost of sales, exclusive of depreciation and amortization
1,530

 
1,726

Selling, general and administrative
299

 
326

Depreciation and amortization
277

 
285

Research and development
24

 
23

Other income (expense) - net
(4
)
 
9

OPERATING PROFIT
623

 
675

Interest expense - net
44

 
46

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
579

 
629

Income taxes
162

 
176

INCOME BEFORE EQUITY INVESTMENTS
417

 
453

Income from equity investments
11

 
9

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
428

 
462

Less: noncontrolling interests
(12
)
 
(14
)
NET INCOME - PRAXAIR, INC.
$
416

 
$
448

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.44

 
$
1.52

Diluted earnings per share
$
1.43

 
$
1.51

Cash dividends per share
$
0.715

 
$
0.65

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
289,143

 
294,195

Diluted shares outstanding
291,652

 
297,253

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


3


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended March 31,
 
2015
 
2014
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
428

 
$
462

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(644
)
 
(20
)
Reclassifications to net income

 
(3
)
Income taxes
(34
)
 
(9
)
Translation adjustments
(678
)
 
(32
)
Funded status - retirement obligations (Note 10):
 
 
 
Retirement program remeasurements
9

 
2

Reclassifications to net income
19

 
13

Income taxes
(10
)
 
(5
)
Funded status - retirement obligations
18

 
10

Derivative instruments (Note 5):
 
 
 
Current quarter unrealized gain (loss)

 
3

Reclassifications to net income

 

Income taxes

 
(1
)
Derivative instruments

 
2

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(660
)
 
(20
)
 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
(232
)
 
442

Less: noncontrolling interests
18

 
(12
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
(214
)
 
$
430

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


4


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
March 31, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
117

 
$
126

Accounts receivable - net
1,751

 
1,796

Inventories
535

 
551

Prepaid and other current assets
323

 
366

TOTAL CURRENT ASSETS
2,726

 
2,839

Property, plant and equipment (less accumulated depreciation of $11,551 in 2015 and $11,857 in 2014)
11,593

 
11,997

Goodwill
3,010

 
3,121

Other intangible assets - net
588

 
603

Other long-term assets
1,206

 
1,242

TOTAL ASSETS
$
19,123

 
$
19,802

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
813

 
$
864

Short-term debt
623

 
587

Current portion of long-term debt
2

 
2

Other current liabilities
897

 
1,037

TOTAL CURRENT LIABILITIES
2,335

 
2,490

Long-term debt
8,771

 
8,669

Other long-term liabilities
2,454

 
2,457

TOTAL LIABILITIES
13,560

 
13,616

Commitments and contingencies (Note 11)

 

Redeemable noncontrolling interests
170

 
176

Praxair, Inc. Shareholders’ Equity:
 
 
 
Common stock $0.01 par value, authorized - 800,000,000 shares, issued 2015 and 2014 - 383,230,625 shares
4

 
4

Additional paid-in capital
3,980

 
3,994

Retained earnings
11,668

 
11,461

Accumulated other comprehensive income (loss)
(3,815
)
 
(3,185
)
Less: Treasury stock, at cost (2015 - 94,920,435 shares and 2014 - 93,969,017 shares)
(6,819
)
 
(6,651
)
Total Praxair, Inc. Shareholders’ Equity
5,018

 
5,623

Noncontrolling interests
375

 
387

TOTAL EQUITY
5,393

 
6,010

TOTAL LIABILITIES AND EQUITY
$
19,123

 
$
19,802

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


5


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
 
 
Three Months Ended March 31,
 
2015
 
2014
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
416

 
$
448

Noncontrolling interests
12

 
14

Net income (including noncontrolling interests)
428

 
462

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization
277

 
285

Deferred income taxes
14

 
23

Share-based compensation
7

 
15

Working capital:
 
 
 
Accounts receivable
(50
)
 
(136
)
Inventory
(6
)
 
(16
)
Prepaid and other current assets
2

 
20

Payables and accruals
(66
)
 
(116
)
Pension contributions
(11
)
 
(9
)
Long-term assets, liabilities and other
(87
)
 
8

Net cash provided by operating activities
508

 
536

INVESTING
 
 
 
Capital expenditures
(397
)
 
(393
)
Acquisitions, net of cash acquired
(5
)
 
(124
)
Divestitures and asset sales
2

 
66

Net cash used for investing activities
(400
)
 
(451
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
38

 
(80
)
Long-term debt borrowings
753

 
847

Long-term debt repayments
(501
)
 
(303
)
Issuances of common stock
44

 
49

Purchases of common stock
(235
)
 
(286
)
Cash dividends - Praxair, Inc. shareholders
(207
)
 
(191
)
Excess tax benefit on share-based compensation
14

 
20

Noncontrolling interest transactions and other
(6
)
 
(140
)
Net cash (used for) provided by financing activities
(100
)
 
(84
)
Effect of exchange rate changes on cash and cash equivalents
(17
)
 
5

Change in cash and cash equivalents
(9
)
 
6

Cash and cash equivalents, beginning-of-period
126

 
138

Cash and cash equivalents, end-of-period
$
117

 
$
144

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

6


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


7


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 2014 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2015.
Accounting Standards Implemented in 2015
The following standards were effective for Praxair in 2015 and their adoption did not have a significant impact on the condensed consolidated financial statements:
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. The adoption of this guidance did not have a significant impact on the condensed consolidated financial statements.

Accounting Standards to be Implemented

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 condensed consolidated financial statements. This guidance will be effective for Praxair beginning in the first quarter 2016, with early adoption optional.
Presentation of Debt Issuance Costs – In April 2015, the FASB issued updated guidance on the presentation of debt issuance costs. The new guidance requires debt issuance costs to be classified as debt rather than deferred charges within the condensed consolidated financial statements. Praxair does not expect this requirement to have a significant impact on the condensed consolidated financial statements. This guidance will be effective for Praxair beginning in the first quarter 2016 on a retrospective basis, with early adoption optional.

Reclassifications – Certain prior years’ amounts have been reclassified to conform to the current year’s presentation.

8


2. Acquisitions
2015 Acquisitions

During the three months ended March 31, 2015 Praxair had acquisitions totaling $5 million. This was due primarily to the acquisition of a packaged gases business in South America.
2014 Acquisitions

During the three months ended March 31, 2014 Praxair had acquisitions totaling $124 million. These consisted of the acquisitions of an industrial gases business in Italy, several packaged gases businesses in North and South America and an equity investment in the Middle East. These transactions resulted in goodwill and other intangible assets of $43 million and $29 million, respectively (see Note 8).
3. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
March 31,
2015
 
December 31,
2014
Inventories
 
 
 
Raw materials and supplies
$
194

 
$
200

Work in process
48

 
52

Finished goods
293

 
299

Total inventories
$
535

 
$
551


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 $40 million and $43 million at March 31, 2015 and December 31, 2014, respectively. These amounts are net of reserves of $40 million and $48 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 2015 were primarily due to foreign exchange rate movements.


9


4. Debt
The following is a summary of Praxair’s outstanding debt at March 31, 2015 and December 31, 2014:
(Millions of dollars)
March 31,
2015
 
December 31,
2014
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
536

 
$
514

Other bank borrowings (primarily international)
87

 
73

Total short-term debt
623

 
587

LONG-TERM
 
 
 
U.S. borrowings (U.S. dollar denominated unless otherwise noted)
 
 
 
4.625% Notes due 2015 (a)

 
500

3.25% Notes due 2015 (b, d)
405

 
408

0.75% Notes due 2016 (b)
400

 
400

Floating Rate Notes due 2017 (e)
150

 

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)
485

 
481

4.50% Notes due 2019 (c)
599

 
599

1.90% Notes due 2019
500

 
500

1.50% Euro-denominated notes due 2020 (c)
641

 
722

4.05% Notes due 2021 (c)
499

 
499

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

 
499

2.65% Notes due 2025 (c, e)
398

 

1.625% Euro-denominated notes due 2025 (c)
532

 
599

3.55% Notes due 2042 (c, e)
666

 
466

Other
4

 
4

International bank borrowings
168

 
167

Obligations under capital leases
8

 
8

 
8,773

 
8,671

Less: current portion of long-term debt
(2
)
 
(2
)
Total long-term debt
8,771

 
8,669

Total debt
$
9,396

 
$
9,258

 
(a)
In March 2015, Praxair repaid $500 million of 4.625% 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 $2.5 billion long-term credit facility.
(c)
Amounts are net of unamortized discounts.
(d)
March 31, 2015 and December 31, 2014 include a $15 million and $14 million fair value increase, respectively, related to hedge accounting. See Note 5 for additional information.
(e)
On February 5, 2015, Praxair issued $150 million of floating rate notes that bear interest at the Federal funds effective rate plus 0.33% due 2017, $400 million of 2.65% fixed rate notes due 2025 and $200 million of 3.550% fixed rate notes due in 2042. The proceeds were used for general corporate purposes, including the repayment of outstanding indebtedness.

10


5. 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 March 31, 2015 and December 31, 2014 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,431

 
$
2,427

 
$
16

 
$
5

 
$
46

 
$
13

Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (b)
875

 
875

 
15

 
14

 

 

Total Derivatives
$
3,306

 
$
3,302

 
$
31

 
$
19

 
$
46

 
$
13

 
(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.
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

11


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 (641 million as of March 31, 2015) 1.50% Euro-denominated notes due 2020 and the €500 million ($532 million as of March 31, 2015) 1.625% Euro-denominated notes due 2025, as a hedge of the net investment position in its European operations. These Euro-denominated debt instruments reduce 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 2014, exchange rate movements have reduced long-term debt by $274 million ($149 million of which was during the first quarter 2015), 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 March 31, 2015, 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 March 31, 2015, $15 million was recognized as an increase in the fair value of these notes ($14 million at December 31, 2014).

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)
March 31,
2015
 
December 31,
2014
Treasury Rate Locks
 
 
 
 
 
 
 
Underlying debt instrument:
 
 
 
 
 
 
 
$500 million 2.20% fixed-rate notes that mature in 2022 (b)
2012
 
$
(2
)
 
$
(1
)
 
$
(1
)
$500 million 3.00% fixed-rate notes that mature in 2021 (b)
2011
 
(11
)
 
(7
)
 
(8
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
7

 
8

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

 

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

 

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.









12


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 March 31,
(Millions of dollars)
2015
 
2014
Derivatives Not Designated as Hedging Instruments
 
 
 
Currency contracts:
 
 
 
Balance sheet items
 
 
 
Debt-related
$
(79
)
 
$
17

Other balance sheet items
(6
)
 
3

Total
$
(85
)
 
$
20

* 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.

The following table summarizes the impact of the company's derivatives designated as hedging instruments that impact AOCI:

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)
March 31,
2015
 
March 31,
2014
 
March 31,
2015
 
March 31,
2014
Currency contracts:
 
 
 
 
 
 
 
Net Investment Hedge
$

 
$
(6
)
 
$

 
$

Less: income taxes

 
2

 

 

Total - Net of Taxes
$

 
$
(4
)
 
$

 
$

 
 
 
 
 
 
 
 
 
 
 
 
**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 2015 or 2014. 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.

6. 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)
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:

13


 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
 
March 31,
2015
 
December 31,
2014
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
31

 
$
19

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
46

 
$
13

 

 

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 March 31, 2015, the estimated fair value of Praxair’s long-term debt portfolio was $8,977 million versus a carrying value of $8,773 million. At December 31, 2014, the estimated fair value of Praxair’s long-term debt portfolio was $8,753 million versus a carrying value of $8,671 million. Differences from carrying amounts are attributable to interest-rate changes subsequent to when the debt was issued.

7. 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 March 31,
 
2015
 
2014
Numerator (Millions of dollars)
 
 
 
Net income - Praxair, Inc.
$
416

 
$
448

Denominator (Thousands of shares)
 
 
 
Weighted average shares outstanding
288,748

 
293,692

Shares earned and issuable under compensation plans
395

 
503

Weighted average shares used in basic earnings per share
289,143

 
294,195

Effect of dilutive securities
 
 
 
Stock options and awards
2,509

 
3,058

Weighted average shares used in diluted earnings per share
291,652

 
297,253

Basic Earnings Per Share
$
1.44

 
$
1.52

Diluted Earnings Per Share
$
1.43

 
$
1.51

Stock options of 2,800,555 were antidilutive and therefore excluded in the computation of diluted earnings per share for the quarter ended March 31, 2015. There were no antidilutive shares for the quarter ended March 31, 2014.

14


8. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended March 31, 2015 were as follows:
(Millions of dollars)
North
America
 
South
America
 
Europe
 
Asia
 
Surface
Technologies
 
Total
Balance, December 31, 2014
$
2,139

 
$
147

 
$
654

 
$
38

 
$
143

 
$
3,121

Acquisitions (Note 2)

 
2

 

 

 

 
2

Purchase adjustments & other

 

 

 

 

 

Foreign currency translation
(15
)
 
(31
)
 
(60
)
 

 
(7
)
 
(113
)
Balance, March 31, 2015
$
2,124

 
$
118

 
$
594

 
$
38

 
$
136

 
$
3,010

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 (refer to Note 1 to the consolidated financial statements of Praxair's 2014 Annual Report on Form 10-K). As a result, no impairment was recorded. There were no indicators of impairment through March 31, 2015.
Changes in the carrying amounts of other intangibles for the three months ended March 31, 2015 were as follows:
(Millions of dollars)
Customer &
License/Use
Agreements
 
Non-compete
Agreements
 
Patents &
Other
 
Total
Cost:
 
 
 
 
 
 
 
Balance, December 31, 2014
$
693

 
$
37

 
$
47

 
$
777

Additions (Note 2)
2

 

 

 
2

Foreign currency translation
(9
)
 

 

 
(9
)
Other *

 
(1
)
 

 
(1
)
Balance, March 31, 2015
$
686

 
$
36

 
$
47

 
$
769

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2014
$
(147
)
 
$
(18
)
 
$
(9
)
 
$
(174
)
Amortization expense
(8
)
 
(3
)
 
(1
)
 
(12
)
Foreign currency translation
4

 

 

 
4

Other *

 
1

 

 
1

Balance, March 31, 2015
$
(151
)
 
$
(20
)
 
$
(10
)
 
$
(181
)
Net balance at March 31, 2015
$
535

 
$
16

 
$
37

 
$
588

* Other relates to the write-off of fully amortized assets.
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 2015
$
35

2016
47

2017
41

2018
37

2019
35

Thereafter
393

 
$
588


15


9. Share-Based Compensation
Share-based compensation of $7 million ($5 million after-tax) and $15 million ($10 million after-tax) was recognized during the quarters ended March 31, 2015 and 2014, respectively. Expense amounts reflect current estimates of achieving performance targets relating to performance-based compensation. 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 2014 Annual Report on Form 10-K.
Stock Options
The weighted-average fair value of options granted during the quarter ended March 31, 2015 was $11.99 ($14.62 in the 2014 first quarter) 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.

The following weighted-average assumptions were used to value the grants in 2015 and 2014 :
 
Three Months Ended March 31,
 
2015
 
2014
Dividend yield
2.2
%
 
2.0
%
Volatility
13.5
%
 
15.2
%
Risk-free interest rate
1.51
%
 
1.57
%
Expected term years
5

 
5

The following table summarizes option activity under the plans as of March 31, 2015 and changes during the three-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, 2015
10,981

 
$
89.02

 
 
 
 
Granted
1,565

 
128.38

 
 
 
 
Exercised
(664
)
 
60.68

 
 
 
 
Cancelled or Expired
(15
)
 
104.78

 
 
 
 
Outstanding at March 31, 2015
11,867

 
95.77

 
5.8
 
$
318

Exercisable at March 31, 2015
9,070

 
$
86.48

 
4.8
 
$
314

The aggregate intrinsic value represents the difference between the company’s closing stock price of $120.74 as of March 31, 2015 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 ended March 31, 2015 was $44 million ($49 million during the same period in 2014).
Cash received from option exercises under all share-based payment arrangements for the quarter ended March 31, 2015 was $40 million ($45 million for the same time period in 2014). The cash tax benefit realized from share-based compensation totaled $23 million for the quarter ended March 31, 2015, of which $14 million in excess tax benefits was classified as financing cash flows for the three months ended March 31, 2015 ($34 million cash tax benefit for the same period in 2014 of which $20 million represented excess tax benefit for the three months ended March 31, 2014).
As of March 31, 2015, $31 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.
Performance-Based and Restricted Stock Awards
During the three months ended March 31, 2015, 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 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.

16


During the three months ended March 31, 2015, 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 three months ended March 31, 2015 was $120.05 and $120.04, ($121.16 and $121.20 for the same period in 2014). 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 March 31, 2015 and changes during the three 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, 2015
833

 
$
109.09

 
307

 
$
106.63

Granted*
215

 
120.05

 
72

 
120.04

Vested
(225
)
 
103.16

 
(1
)
 
106.35

Cancelled
(15
)
 
112.60

 
(26
)
 
109.80

Non-vested at March 31, 2015
808

 
$
114.49

 
352

 
$
110.83


* Amounts for performance-based awards include an adjustment of 35 thousand shares relating to the actual payout of 2012 grants in 2015.
In addition to what is included in the table above, there are approximately 16 thousand performance-based shares and 30 thousand restricted stock shares that are non-vested at March 31, 2015 which will be settled in cash due to foreign regulatory limitations. The liability related to these grants reflects the current estimate of performance that will be achieved and the current common stock price.
As of March 31, 2015, based on current estimates of future performance, $48 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2018 and $20 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2018.
10. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters ended March 31, 2015 and 2014 are shown below:
 
 
Quarter Ended March 31,
 
Pensions
 
OPEB
(Millions of dollars)
2015
 
2014
 
2015
 
2014
Service cost
$
14

 
$
13

 
$
1

 
$
1

Interest cost
28

 
31

 
2

 
3

Expected return on plan assets
(39
)
 
(40
)
 

 

Net amortization and deferral
20

 
15

 
(1
)
 
(2
)
Net periodic benefit cost before pension settlement charge
$
23

 
$
19

 
$
2

 
$
2

Praxair estimates that 2015 required contributions to its pension plans will be in the area of $15 million, of which $11 million have been made through March 31, 2015.

In 2014 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. As a result, Praxair anticipates that it will record a pension settlement expense of approximately $7 million in the third quarter 2015 when the payments are made to the retirees.



17


11. 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 2014 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 March 31, 2015 the most significant non-income and income tax claims in Brazil, after enrollment in the Refis Program, relate to state VAT tax matters 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 $185 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$686 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$530 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.

18


12. Segments
Sales and operating profit by segment for the quarters ended March 31, 2015 and 2014 are shown below. For a description of Praxair’s operating segments, refer to Note 18 to the consolidated financial statements of Praxair’s 2014 Annual Report on Form 10-K.
  
Quarter Ended March 31,
(Millions of dollars)
2015
 
2014
SALES(a) 
 
 
 
North America
$
1,499

 
$
1,580

Europe
326

 
397

South America
401

 
488

Asia
371

 
392

Surface Technologies
160

 
169

Total sales
$
2,757

 
$
3,026

  
Quarter Ended March 31,
(Millions of dollars)
2015
 
2014
OPERATING PROFIT
 
 
 
North America
$
379

 
$
378

Europe
62

 
79

South America
85

 
113

Asia
69

 
75

Surface Technologies
28

 
30

Total operating profit
$
623

 
$
675

 
(a)
Sales reflect external sales only. Intersegment sales, primarily from North America to other segments, were not material.


19



13. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters ended March 31, 2015 and 2014 is provided below:

Quarter Ended March 31,
(Millions of dollars)
2015
 
2014
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
5,623

 
$
387

 
$
6,010

 
$
6,609

 
$
394

 
$
7,003

Net income (a)
416

 
9

 
425

 
448

 
10

 
458

Other comprehensive income (loss)
(630
)
 
(21
)
 
(651
)
 
(17
)
 
(3
)
 
(20
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions) (b)

 
2

 
2

 
(24
)
 

 
(24
)
Dividends and other capital changes

 
(2
)
 
(2
)
 

 
(3
)
 
(3
)
Redemption value adjustments
(3
)
 

 
(3
)
 
(1
)
 

 
(1
)
Dividends to Praxair, Inc. common stock holders ($0.715 per share in 2015 and $0.65 per share in 2014)
(207
)
 

 
(207
)
 
(191
)
 

 
(191
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
2

 

 
2

 
1

 

 
1

For employee savings and incentive plans
30

 

 
30

 
33

 

 
33

Purchases of common stock
(234
)
 

 
(234
)
 
(293
)
 

 
(293
)
Tax benefit from share-based compensation
14

 

 
14

 
20

 

 
20

Share-based compensation
7

 

 
7

 
15

 

 
15

Balance, end of period
$
5,018

 
$
375

 
$
5,393

 
$
6,600

 
$
398

 
$
6,998

 
 
 
 
 
 
 
 
 
 
 
 

(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $3 million for the quarter ended March 31, 2015 ( $4 million for the same time periods in 2014, 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:
 
March 31,
 
December 31,
(Millions of dollars)
2015
 
2014
Cumulative translation adjustment (includes $98 million and $64 million tax charge in March 31, 2015 and December 31, 2014, respectively)
 
 
 
North America
$
(655
)
 
$
(553
)
South America
(1,882
)
 
(1,510
)
Europe
(484
)
 
(432
)
Asia
(146
)
 
(49
)
Surface Technologies
(32
)
 
(7
)
 
(3,199
)
 
(2,551
)
Derivatives - net of taxes
(1
)
 
(1
)
Pension / OPEB funded status obligation (net of $332 million and $342 million tax benefit in March 31, 2015 and December 31, 2014, respectively)
(615
)
 
(633
)
 
$
(3,815
)
 
$
(3,185
)

20


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 three months ended March 31, 2015 and 2014: 
(Millions of dollars)
2015
 
2014
Balance, January 1,
$
176

 
$
307

Net income
3

 
4

Distributions to noncontrolling interest
(3
)
 
(6
)
Redemption value adjustments/accretion
3

 
1

Foreign currency translation and other
(9
)
 
1

Purchase of noncontrolling interest *

 
(112
)
Balance, March 31,
$
170

 
$
195


* 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".

21


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

Consolidated Results

Praxair's results in the first quarter were challenged by significant negative impacts from foreign currency translation, as the U.S. dollar strengthened sharply against most major foreign currencies. Praxair reported sales of $2,757 million, 9% below the prior-year quarter. Foreign currency translation reduced sales by 8% and lower cost pass-through, primarily natural gas, lowered sales by 2% compared to the first quarter of 2014. Excluding these impacts, organic sales were 1% above the prior year due to higher overall pricing levels. Overall volumes were comparable to the 2014 first quarter, as volume growth in North America and Asia was offset by lower volumes in South America. Operating profit decreased $52 million, or 8%, for the quarter ended March 31, 2015 versus the respective 2014 period primarily due to the impact of foreign currency translation. Excluding the foreign currency effects, operating profit was comparable to the prior-year period. Operating margin was a strong 22.6%, 30 basis points above the prior year quarter. Earnings per share of $1.43 was 5% below the prior year due to lower net income, primarily due to foreign currency translation impacts, which were partially offset by a reduction in the number of diluted shares outstanding as a result of the company's net repurchases of common stock.
Outlook
Diluted earnings per share for the second quarter of 2015 are expected to be in the range of $1.40 to $1.48.
Diluted earnings per share for the full year of 2015 are expected to be in the range of $5.90 to $6.15.
For the full year of 2015, Praxair expects sales in the area of $11.4 to $11.7 billion. Full-year capital expenditures are expected to be about $1.6 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 March 31, 2015, Praxair’s backlog of 21 large projects under construction was $2.1 billion. This represents the total estimated capital cost of large plants under construction. North America represents approximately half of the backlog while Asia represents approximately 25%. The remaining backlog resides in Europe and in 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.


22


The following table provides summary data for the quarter ended March 31, 2015 and 2014:
  
Quarter Ended March 31,
(Dollar amounts in millions, except per share data)
2015
 
2014
 
Variance
Reported Amounts
 
 
 
 
 
Sales
$
2,757

 
$
3,026

 
(9
)%
Cost of sales, exclusive of depreciation and amortization
$
1,530

 
$
1,726

 
(11
)%
Gross margin (a)
$
1,227

 
$
1,300

 
(6
)%
As a percent of sales
44.5
%
 
43.0
%
 
 
Selling, general and administrative
$
299

 
$
326

 
(8
)%
As a percent of sales
10.8
%
 
10.8
%
 
 
Depreciation and amortization
$
277

 
$
285

 
(3
)%
Other income (expense) - net
$
(4
)
 
$
9

 
 
Operating profit
$
623

 
$
675

 
(8
)%
As a percent of sales
22.6
%
 
22.3
%
 
 
Interest expense - net
$
44

 
$
46

 
(4
)%
Effective tax rate
28.0
%
 
28.0
%
 
 
Income from equity investments
$
11

 
$
9

 
22
 %
Noncontrolling interests
$
(12
)
 
$
(14
)
 
(14
)%
Net income - Praxair, Inc.
$
416

 
$
448

 
(7
)%
Diluted earnings per share
$
1.43

 
$
1.51

 
(5
)%
Diluted shares outstanding
291,652

 
297,253

 
(2
)%
 
(a)
Gross margin excludes depreciation and amortization expense.


23


Results of Operations
The changes in consolidated sales and operating profit compared to the prior year are attributable to the following:
 
 
Quarter Ended March 31, 2015 vs. 2014
 
% Change
 
Sales
 
Operating Profit
Factors Contributing to Changes
 
 
 
Volume
 %
 
(3
)%
Price
1
 %
 
5
 %
Cost pass-through
(2
)%
 
 %
Currency
(8
)%
 
(8
)%
Acquisitions/divestitures
 %
 
 %
Other
 %
 
(2
)%
Reported
(9
)%
 
(8
)%
The following tables provide sales by end-market and distribution method:
 
 
Quarter Ended March 31,
 
% of Sales
 
% Change*
 
2015
 
2014
 
Sales by End Markets
 
 
 
 
 
Manufacturing
25
%
 
23
%
 
1
 %
Metals
17
%
 
17
%
 
(2
)%
Energy
13
%
 
13
%
 
3
 %
Chemicals
10
%
 
11
%
 
(7
)%
Electronics
7
%
 
7
%
 
5
 %
Healthcare
8
%
 
8
%
 
4
 %
Food & Beverage
8
%
 
8
%
 
7
 %
Aerospace
3
%
 
3
%
 
4
 %
Other
9
%
 
10
%
 
(9
)%
 
100
%
 
100
%
 
 
 * Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
 
 
Quarter Ended March 31,
 
% of Sales
 
2015
 
2014
Sales by Distribution Method
 
 
 
On- Site
28
%
 
30
%
Merchant
34
%
 
33
%
Packaged Gas
29
%
 
28
%
Other
9
%
 
9
%
 
100
%
 
100
%


Sales decreased $269 million, or 9%, for the three months ended March 31, 2015 versus 2014 period primarily due to negative currency translation impacts of 8%. Excluding negative currency effects and lower cost pass-through which reduced sales by 2%, sales increased 1% due to higher pricing.

Gross margin decreased $73 million, or 6%, for the three months ended March 31, 2015 versus the respective 2014 period primarily due to lower sales. Gross margin as percentage of sales improved to 44.5% for the three months ended March 31, 2015 from 43.0% for the three months ended March 31, 2014 primarily due to higher pricing.

24



Selling, general and administrative expenses ("SGA") decreased $27 million, or 8%, for the three months ended March 31, 2015 versus 2014 period primarily due to currency effects. SGA as a percent of sales was consistent with the prior-year quarter.

Depreciation and amortization expense decreased $8 million, or 3%, for the three months ended March 31, 2015 versus the respective 2014 period. Currency effects reduced depreciation and amortization expense by $21 million. This was partially offset by higher depreciation expense primarily related to new project start-ups.

Other income (expense) – net was $(4) million expense for the three months ended March 31, 2015, compared to $9 million of income in the prior-year quarter. Other income (expense) - net in 2014 included a gain on an asset sale in South America.

Operating profit decreased $52 million, or 8% in the quarter. Higher pricing increased operating profit by 5% which was more than offset by the negative impact of foreign currency translation. A discussion of operating profit by segment is included in the segment discussion that follows. Operating Margin improved 30 basis points from the prior-year quarter to 22.6%.

Interest expense-net decreased $2 million, or 4%, for the three months ended March 31, 2015 versus the respective 2014 period. Lower average interest rates reduced interest expense by $5 million. This decrease was partially offset by the impact of higher debt levels which increased interest expense by $3 million.

The effective tax rate was 28% for both periods presented.

Income from equity investments for the three months ended March 31, 2015 and 2014 was $11 million and $9 million, respectively. Praxair’s significant sources of equity income are in China, Italy, and the Middle East.

At March 31, 2015, non-controlling interests consisted primarily of non-controlling shareholders' investments in Asia (primarily China and India), Europe (primarily Italy and Scandinavia), and North America (primarily within the U.S. packaged gas business). Non-controlling interests decreased $2 million for the three months ended March 31, 2015 versus the respective 2014 period due primarily to the acquisition of the non-controlling interest in a U.S. packaged gas business during the first quarter of 2014, and impacts of foreign currency translation.

Net income-Praxair, Inc. decreased $32 million, or 7%, for three months ended March 31, 2015, versus the respective 2014 period primarily due to lower operating profit which was significantly impacted by foreign currency translation, partially offset by lower income tax and interest expense. Net income decreased less than sales due to lower costs including SGA expense, lower non-controlling interest and lower interest expense.

Earnings per share of $1.43 for the three months ended March 31, 2015 decreased 5% from the prior-year. This decrease is attributable to lower net income which was partially offset by a reduction in the number of diluted shares outstanding as a result of the company's net repurchases of common stock.

Other Comprehensive Income

Other comprehensive loss for the three months ended March 31, 2015 of $660 million results primarily from negative currency translation adjustments of $678 million. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars. The negative translation adjustments in the quarter resulted primarily from the strengthening of the U.S. dollar against most major currencies. See "Currency" section of the MD&A for exchange rates used for translation purposes and Note 13 to the condensed consolidated financial statements for a summary of the currency translation adjustment component of accumulated other comprehensive income by segment.




25


Segment Discussion
The following summary of sales and operating profit by segment provides a basis for the discussion that follows.
 
 
Quarter Ended March 31,
(Dollar amounts in millions)
2015
 
2014
 
Variance
SALES
 
 
 
 
 
North America
$
1,499

 
$
1,580

 
(5
)%
Europe
326

 
397

 
(18
)%
South America
401

 
488

 
(18
)%
Asia
371

 
392

 
(5
)%
Surface Technologies
160

 
169

 
(5
)%
 
$
2,757

 
$
3,026

 
(9
)%
OPERATING PROFIT
 
 
 
 
 
North America
$
379

 
$
378

 
 %
Europe
62

 
79

 
(22
)%
South America
85

 
113

 
(25
)%
Asia
69

 
75

 
(8
)%
Surface Technologies
28

 
30

 
(7
)%
Segment operating profit
$
623

 
$
675

 
(8
)%


26


North America
 
Quarter Ended March 31,
 
2015
 
2014
 
Variance
Sales
$
1,499

 
$
1,580

 
(5
)%
Cost of sales, exclusive of depreciation and amortization
791

 
870

 
 
Gross margin
708

 
710

 
 
Operating expenses
179

 
183

 
 
Depreciation and amortization
150

 
149

 
 
Operating profit
$
379

 
$
378

 
 %
Margin %
25.3
%
 
23.9
%
 
 
 
 
Quarter Ended March 31, 2015 vs. 2014
 
% Change
 
Sales
 
Operating Profit
Factors Contributing to Changes
 
 
 
Volume
1
 %
 
2
 %
Price
 %
 
1
 %
Cost pass-through
(4
)%
 
 %
Currency
(3
)%
 
(3
)%
Acquisitions/divestitures
1
 %
 
1
 %
Other
 %
 
(1
)%
 
(5
)%
 
 %
The following tables provide sales by end-market and distribution method:
 
Quarter Ended March 31,
 
% of Sales
 
% Change*
 
2015
 
2014
 
Sales by End Markets
 
 
 
 
 
Manufacturing
31
%
 
30
%
 
1
 %
Metals
12
%
 
12
%
 
(8
)%
Energy
18
%
 
20
%
 
4
 %
Chemicals
10
%
 
11
%
 
(12
)%
Electronics
4
%
 
3
%
 
29
 %
Healthcare
7
%
 
7
%
 
5
 %
Food & Beverage
9
%
 
8
%
 
7
 %
Aerospace
1
%
 
1
%
 
(5
)%
Other
8
%
 
8
%
 
(4
)%
 
100
%
 
100
%
 
 
 * Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
 
Quarter Ended March 31,
 
% of Sales
 
2015
 
2014
Sales by Distribution Method
 
 
 
On- Site
28
%
 
32
%
Merchant
37
%
 
35
%
Packaged Gas
33
%
 
32
%
Other
2
%
 
1
%
 
100
%
 
100
%
The North America segment includes Praxair's industrial gases operations in the United States, Canada and Mexico.

27


North America segment sales decreased $81 million, or 5%, as compared to the prior-year quarter and decreased 2% excluding currency translation impacts. Organic sales growth was 1% driven primarily by higher volumes. By end-market, the increase in sales growth came primarily from manufacturing, food and beverage and healthcare, which was partially offset by a decline in the metals and chemicals end-markets. Acquisitions of packaged gas distributors added 1% growth during the current quarter. Lower cost pass-through, primarily relating to natural gas prices passed through to hydrogen customers, decreased sales by 4%. On-site sales were lower as a percent of total sales due to lower volumes of pipeline oxygen to steel customers, and lower hydrogen sales due to pass-through of lower natural gas prices. Overall on-site hydrogen volumes were above the prior-year quarter.
North America segment operating profit increased $1 million in the quarter as compared to the prior year. Excluding the effects of currency, operating profit increased 3% which was primarily driven by higher volumes and pricing and acquisitions.
Europe
 
Quarter Ended March 31,
 
2015
 
2014
 
Variance %
Sales
$
326

 
$
397

 
(18
)%
Cost of sales, exclusive of depreciation and amortization
182

 
218

 
 
Gross margin
144

 
179

 
 
Operating expenses
46

 
57

 
 
Depreciation and amortization
36

 
43

 
 
Operating profit
$
62

 
$
79

 
(22
)%
Margin %
19.0
%
 
19.9
%
 
 
 
Quarter Ended March 31, 2015 vs. 2014
 
% Change
 
% Change
 
Sales
 
Operating Profit
Factors Contributing to Changes
 
 
 
Volume
 %
 
(1
)%
Price
1
 %
 
2
 %
Cost pass-through
 %
 
 %
Currency
(18
)%
 
(19
)%
Acquisitions/divestitures
(1
)%
 
1
 %
Other
 %
 
(5
)%
 
(18
)%
 
(22
)%

The following tables provide sales by end-market and distribution method:
 
Quarter Ended March 31,
 
% of Sales
 
% Change*
 
2015
 
2014
 
Sales by End Markets
 
 
 
 
 
Manufacturing
22
%
 
23
%
 
1
 %
Metals
17
%
 
16
%
 
8
 %
Energy
6
%
 
6
%
 
(8
)%
Chemicals
14
%
 
16
%
 
(6
)%
Electronics
8
%
 
7
%
 
8
 %
Healthcare
11
%
 
11
%
 
(1
)%
Food & Beverage
9
%
 
9
%
 
2
 %
Aerospace
1
%
 
1
%
 
 %
Other
12
%
 
11
%
 
 %
 
100
%
 
100
%
 
 
* Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures

28


 
Quarter Ended March 31,
 
% of Sales
 
2015
 
2014
Sales by Distribution Method
 
 
 
On- Site
19
%
 
19
%
Merchant
34
%
 
35
%
Packaged Gas
43
%