10-Q 1 px-q3201510q.htm PRAXAIR, INC. 2015 THIRD QUARTER FORM 10-Q 10-Q
 
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, 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 September 30, 2015, 284,845,518 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
Consolidated Statements of Income - Praxair, Inc. and Subsidiaries Quarters Ended September 30, 2015 and 2014 (Unaudited)
 
 
 
 
Consolidated Statements of Income - Praxair Inc. and Subsidiaries Nine Months Ended September 30, 2015 and 2014 (Unaudited)
4
 
 
 
 
5
 
 
 
 
Consolidated Statements of Comprehensive Income - Praxair, Inc. and Subsidiaries Nine Months Ended September 30, 2015 and 2014 (Unaudited)
6
 
 
 
 
Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries September 30, 2015 and December 31, 2014 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries Nine Months Ended September 30, 2015 and 2014 (Unaudited)
8
 
 
 
 
9
 
 
 
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,
 
2015
 
2014
SALES
$
2,686

 
$
3,144

Cost of sales, exclusive of depreciation and amortization
1,488

 
1,780

Selling, general and administrative
281

 
327

Depreciation and amortization
276

 
301

Research and development
23

 
25

Cost reduction program and other charges
26

 

Other income (expense) - net
2

 

OPERATING PROFIT
594

 
711

Interest expense - net
35

 
45

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
559

 
666

Income taxes
156

 
187

INCOME BEFORE EQUITY INVESTMENTS
403

 
479

Income from equity investments
10

 
11

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
413

 
490

Less: noncontrolling interests
(12
)
 
(13
)
NET INCOME - PRAXAIR, INC.
$
401

 
$
477

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.40

 
$
1.63

Diluted earnings per share
$
1.40

 
$
1.62

Cash dividends per share
$
0.715

 
$
0.65

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
285,651

 
292,170

Diluted shares outstanding
287,311

 
295,239

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,
 
2015
 
2014
SALES
$
8,181

 
$
9,283

Cost of sales, exclusive of depreciation and amortization
4,534

 
5,273

Selling, general and administrative
877

 
988

Depreciation and amortization
831

 
879

Research and development
70

 
72

Cost reduction program and other charges
172

 

Other income (expense) - net

 
12

OPERATING PROFIT
1,697

 
2,083

Interest expense - net
119

 
134

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
1,578

 
1,949

Income taxes
449

 
546

INCOME BEFORE EQUITY INVESTMENTS
1,129

 
1,403

Income from equity investments
31

 
30

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
1,160

 
1,433

Less: noncontrolling interests
(35
)
 
(41
)
NET INCOME - PRAXAIR, INC.
$
1,125

 
$
1,392

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
3.91

 
$
4.75

Diluted earnings per share
$
3.88

 
$
4.70

Cash dividends per share
$
2.145

 
$
1.95

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
287,578

 
293,103

Diluted shares outstanding
289,835

 
296,240

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


4


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended September 30,
 
2015
 
2014
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
413

 
$
490

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(792
)
 
(604
)
Income taxes
28

 
(5
)
Translation adjustments
(764
)
 
(609
)
Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
16

 
18

Reclassifications to net income
27

 
12

Income taxes
(10
)
 
(9
)
Funded status - retirement obligations
33

 
21

Derivative instruments (Note 6):
 
 
 
Current quarter unrealized gain (loss)
(1
)
 

Reclassifications to net income
1

 

Income taxes

 

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(731
)
 
(588
)
 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
(318
)
 
(98
)
Less: noncontrolling interests
5

 
7

COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
(313
)
 
$
(91
)
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,
 
2015
 
2014
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
1,160

 
$
1,433

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
 Foreign currency translation adjustments
(1,366
)
 
(460
)
 Reclassifications to net income

 
(3
)
 Income taxes
15

 
(20
)
Translation adjustments
(1,351
)
 
(483
)
Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(7
)
 
2

Reclassifications to net income
66

 
39

Income taxes
(16
)
 
(13
)
Funded status - retirement obligations
43

 
28

Derivative instruments (Note 6):
 
 
 
Current period unrealized gain (loss)
(1
)
 
3

Reclassifications to net income
1

 

Income taxes

 
(1
)
Derivative instruments

 
2

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(1,308
)
 
(453
)
 
 
 
 
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)
(148
)
 
980

Less: noncontrolling interests
2

 
(18
)
COMPREHENSIVE INCOME - PRAXAIR, INC.
$
(146
)
 
$
962

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, 2015
 
December 31, 2014
ASSETS
 
 
 
Cash and cash equivalents
$
136

 
$
126

Accounts receivable - net
1,690

 
1,796

Inventories
526

 
551

Prepaid and other current assets
374

 
366

TOTAL CURRENT ASSETS
2,726

 
2,839

Property, plant and equipment (less accumulated depreciation of $11,672 in 2015 and $11,857 in 2014)
10,970

 
11,997

Goodwill
2,997

 
3,121

Other intangible assets - net
567

 
603

Other long-term assets
1,196

 
1,242

TOTAL ASSETS
$
18,456

 
$
19,802

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
750

 
$
864

Short-term debt
458

 
587

Current portion of long-term debt
2

 
2

Other current liabilities
912

 
1,037

TOTAL CURRENT LIABILITIES
2,122

 
2,490

Long-term debt
9,057

 
8,669

Other long-term liabilities
2,464

 
2,457

TOTAL LIABILITIES
13,643

 
13,616

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests (Note 14)
169

 
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
3,998

 
3,994

Retained earnings
11,966

 
11,461

Accumulated other comprehensive income (loss) (Note 14)
(4,456
)
 
(3,185
)
Less: Treasury stock, at cost (2015 - 98,385,107 shares and 2014 - 93,969,017 shares)
(7,248
)
 
(6,651
)
Total Praxair, Inc. Shareholders’ Equity
4,264

 
5,623

Noncontrolling interests
380

 
387

TOTAL EQUITY
4,644

 
6,010

TOTAL LIABILITIES AND EQUITY
$
18,456

 
$
19,802

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,
 
2015
 
2014
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
1,125

 
$
1,392

Noncontrolling interests
35

 
41

Net income (including noncontrolling interests)
1,160

 
1,433

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Cost reduction program and other charges, net of payments
139

 

Depreciation and amortization
831

 
879

Deferred income taxes
25

 
(32
)
Share-based compensation
25

 
42

Working capital:
 
 
 
Accounts receivable
(57
)
 
(144
)
Inventory
(14
)
 
(52
)
Prepaid and other current assets
(37
)
 
18

Payables and accruals
(20
)
 
(3
)
Pension contributions
(13
)
 
(14
)
Long-term assets, liabilities and other
(148
)
 
(31
)
Net cash provided by operating activities
1,891

 
2,096

INVESTING
 
 
 
Capital expenditures
(1,154
)
 
(1,207
)
Acquisitions, net of cash acquired
(43
)
 
(191
)
Divestitures and asset sales
245

 
86

Net cash used for investing activities
(952
)
 
(1,312
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
(126
)
 
(161
)
Long-term debt borrowings
1,496

 
867

Long-term debt repayments
(999
)
 
(312
)
Issuances of common stock
74

 
85

Purchases of common stock
(704
)
 
(562
)
Cash dividends - Praxair, Inc. shareholders
(615
)
 
(570
)
Excess tax benefit on share-based compensation
18

 
28

Noncontrolling interest transactions and other
(31
)
 
(123
)
Net cash (used for) provided by financing activities
(887
)
 
(748
)
Effect of exchange rate changes on cash and cash equivalents
(42
)
 
(6
)
Change in cash and cash equivalents
10

 
30

Cash and cash equivalents, beginning-of-period
126

 
138

Cash and cash equivalents, end-of-period
$
136

 
$
168

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 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.
Business Combinations - Simplifying the Accounting for Measurement-Period Adjustments – In September 2015, the FASB issued updated guidance on the accounting for purchase accounting adjustments determined during the measurement period (i.e. up to one year after the acquisition). The new guidance requires an acquirer to recognize such adjustments in the reporting period in which the adjustment amounts are determined. Previously, such adjustments were required to be recorded on a retrospective basis. Praxair has elected to early adopt this guidance beginning in the third quarter 2015 on a prospective basis. 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 is required to be effective beginning in the first quarter 2018 (with early adoption beginning in 2017 optional) 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 its consolidated financial statements. This guidance will be effective for Praxair beginning in the first quarter 2016 on a retrospective basis, with early adoption optional. The balance sheet reclassification required by this standard will not be material for Praxair.
Simplifying the Measurement of Inventory – In July 2015, the FASB issued updated guidance on the measurement of inventory. The new guidance requires that inventory be measured at the lower of cost or net realizable value. Currently inventory is measured at the lower of cost or market. This new guidance will be effective for Praxair beginning in the first quarter 2017 on a prospective basis, with early adoption optional. Praxair does not expect this requirement to have a material impact.

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

10


2. Cost Reduction Program and Other Charges

Pension Settlement Charge
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. Accordingly, when the cash payments were made in the third quarter of 2015, Praxair recorded a pension settlement charge related to net unrecognized actuarial losses of $7 million ($5 million after-tax or $0.02 per diluted share).

Cost Reduction Program and Other Charges
In the second quarter of 2015, Praxair recorded pre-tax charges totaling $146 million ($112 million after-tax and noncontrolling interests or $0.39 per diluted share) and in the third quarter recorded pre-tax charges totaling $19 million ($13 million after-tax or $0.04 per diluted share). The charges related primarily to severance and other costs associated with a cost reduction program, which was initiated in response to lower volumes resulting from economic slowdown in emerging markets and energy related end-markets.

Following is a summary of the pre-tax charges by reportable segment.
(millions of dollars)
Severance costs
 
Other Charges
 
Total
North America
$
14

 
$
20

 
$
34

Europe
11

 
9

 
20

South America
18

 
49

 
67

Asia
11

 
14

 
25

Surface Technologies
9

 
10

 
19

Total
$
63

 
$
102

 
$
165

The severance costs of $63 million are for the elimination of 1,544 positions. The majority of actions are anticipated to be completed in 2015.
The other charges of $102 million are primarily related to the consolidation of operations and the exit of other operations due to current economic conditions, primarily in Brazil. Amounts related to asset write-downs are net of expected sale proceeds, which are not significant. Severance costs related to these actions are included in the previous paragraph. Following is a summary:
i.
The North America charges of $20 million relate primarily to the decision to consolidate certain manufacturing and distribution locations for efficiencies and cost reduction.
ii.
The Europe charges of $9 million are primarily for the restructuring of operations in Russia and energy-related businesses in Northern Europe.
iii.
The South America charges of $49 million include costs primarily associated with a decision to exit a non-core business and other operations in South America.
iv.
The Asia charges of $14 million include costs primarily related to an asset disposal in China.
v.
The Surface Technologies charges of $10 million relate to the realignment of sales and manufacturing operations in Europe and the United States for efficiencies and cost reduction.
Additionally, for the nine-month period ended September 30, 2015 income taxes include a $10 million increase in valuation allowances relating to U.S. foreign tax credit carryforwards, reflecting the impact of current economic conditions.

Cash Requirements
The total cash requirements of the cost reduction program and other charges are estimated to be approximately $94 million, of which $26 million was paid through September 30, 2015.


11


Classification in the consolidated financial statements
The pension settlement charge and cost reduction program and other charges of $26 million for the third quarter and $172 million for the year-to-date period are shown together as a separate line item on the consolidated statement of operations. The tax benefits of $8 million for the third quarter and $41 million for the year-to-date period are reflected in income taxes. The noncontrolling interests impact was $1 million for the year-to-date period ended September 30, 2015. In the consolidated balance sheets, asset write-offs are recorded as a reduction to the carrying value of the related assets and unpaid amounts are recorded primarily as short-term liabilities. On the consolidated statement of cash flows, the pre-tax impact of the cost reduction program and other charges, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In the segments Note 13, Praxair excluded these charges from its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the operating profit table.

Reconciliation

The following table summarizes the activities related to the company’s cost reduction and other charges during 2015:
(millions of dollars)
Severance costs
 
Other Charges
 
Total
Cost reduction program and other charges - Q2/Q3 2015
$
63

 
$
102

 
$
165

Less: Cash payments
(19
)
 
(7
)
 
(26
)
Less: Non-cash asset write-offs

 
(68
)
 
(68
)
Foreign currency translation
(2
)
 
(1
)
 
(3
)
Balance, September 30, 2015
$
42

 
$
26

 
$
68



12


3. Acquisitions
2015 Acquisitions

During the nine months ended September 30, 2015, Praxair had acquisitions totaling $43 million, primarily acquisitions of packaged gases businesses in North and South America. These transactions resulted in goodwill and other intangible assets of $28 million and $10 million, respectively (see Note 9).
2014 Acquisitions

During the nine months ended September 30, 2014, Praxair had acquisitions totaling $191 million, primarily 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).
4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
September 30,
2015
 
December 31,
2014
Inventories
 
 
 
Raw materials and supplies
$
183

 
$
200

Work in process
49

 
52

Finished goods
294

 
299

Total inventories
$
526

 
$
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 $33 million and $43 million at September 30, 2015 and December 31, 2014, respectively. These amounts are net of reserves of $34 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.


13


5. Debt
The following is a summary of Praxair’s outstanding debt at September 30, 2015 and December 31, 2014:
(Millions of dollars)
September 30,
2015
 
December 31,
2014
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
337

 
$
514

Other bank borrowings (primarily international)
121

 
73

Total short-term debt
458

 
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 (a)

 
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)
487

 
481

4.50% Notes due 2019 (c)
599

 
599

1.90% Notes due 2019
500

 
500

1.50% Euro-denominated notes due 2020 (c)
667

 
722

2.25% Notes due 2020 (e)
300

 

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)
554

 
599

3.20% Notes due 2026 (c, e)
448

 

3.55% Notes due 2042 (c, e)
667

 
466

Other
4

 
4

International bank borrowings
60

 
167

Obligations under capital leases
8

 
8

 
9,059

 
8,671

Less: current portion of long-term debt
(2
)
 
(2
)
Total long-term debt
9,057

 
8,669

Total debt
$
9,517

 
$
9,258

 
(a)
In March 2015, Praxair repaid $500 million of 4.625% notes that became due. In September 2015, Praxair repaid $400 million of 3.25% 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)
September 30, 2015 and December 31, 2014 include a $12 million and $14 million fair value increase, respectively, related to hedge accounting. See Note 6 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. On September 21, 2015, Praxair issued the following notes: $300 million of 2.25% notes due 2020 and $450 million of 3.20% notes due 2026. The proceeds of these debt issuances were used for general corporate purposes, including acquisitions, repayment of debt and share repurchases under the company's share repurchase program.


14


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, 2015 and December 31, 2014 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,756

 
$
2,427

 
$
11

 
$
5

 
$
33

 
$
13

Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
38

 
$

 
$

 
$

 
$

 
$

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (b)
475

 
875

 
12

 
14

 

 

Total Derivatives
$
3,269

 
$
3,302

 
$
23

 
$
19

 
$
33

 
$
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 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. Certain forward currency contracts are entered into to protect underlying monetary assets and liabilities denominated in foreign currencies from foreign exchange risk and are not designated as hedging instruments. The fair value adjustments on these contracts are offset by the fair value adjustments recorded on the underlying monetary assets and liabilities. Praxair also enters into forward currency contracts, which are designated as hedging

15


instruments, to limit the cash flow exposure on certain foreign-currency denominated intercompany loans. The fair value adjustments on these contracts are recorded to AOCI, with the effective portion immediately reclassified to earnings to offset the fair value adjustments on the underlying debt instrument.

Net Investment Hedge

Praxair has designated the €600 million ($667 million as of September 30, 2015) 1.50% Euro-denominated notes due 2020 and the €500 million ($554 million as of September 30, 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 $226 million ($101 million of which was during the first three quarters of 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 September 30, 2015, Praxair had one outstanding interest rate swap agreement with a $475 million notional amount related to the $475 million 1.25% notes that mature in 2018. The interest rate swap effectively converts fixed-rate interest to variable-rate interest and is designated as a fair value hedge. Fair value adjustments are 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, 2015, $12 million was recognized as an increase in the fair value of these notes ($14 million at December 31, 2014). The other interest rate swap agreement, which was previously designated as a fair value hedge and which related to the $400 million 3.25% fixed-rate notes, matured in Q3 2015.

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,
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

 
6

 
8

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

 

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

 

After- tax amounts
 
 
 
 
$
(2
)
 
$
(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.






16


The following table summarizes the impact 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)
2015
 
2014
 
2015
 
2014
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
 
 
 
 
 
 
 
Debt-related
$
(93
)
 
$
(45
)
 
$
(171
)
 
$
(16
)
Other balance sheet items
(6
)
 
(5
)
 
(11
)
 
(1
)
Total
$
(99
)
 
$
(50
)
 
$
(182
)
 
$
(17
)
* 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 tables summarize the impacts 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)
September 30,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$
(1
)
 
$

 
$
(1
)
 
$

Total - pre tax
$
(1
)
 
$

 
$
(1
)
 
$

Less: income taxes

 

 

 

Total - Net of Taxes
$
(1
)
 
$

 
$
(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,
2015
 
September 30,
2014
 
September 30,
2015
 
September 30,
2014
Currency contracts:
 
 
 
 
 
 
 
Net Investment Hedge
$

 
$
(6
)
 
$

 
$

Balance sheet items
(1
)
 

 
(1
)
 

Total - pre tax
$
(1
)
 
$
(6
)
 
$
(1
)
 
$

Less: income taxes

 
2

 

 

Total - Net of Taxes
$
(1
)
 
$
(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 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.


17


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)
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,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
 
September 30,
2015
 
December 31,
2014
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
23

 
$
19

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
33

 
$
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 September 30, 2015, the estimated fair value of Praxair’s long-term debt portfolio was $9,066 million versus a carrying value of $9,059 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.

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,
 
2015
 
2014
 
2015
 
2014
Numerator (Millions of dollars)
 
 
 
 
 
 
 
Net income - Praxair, Inc.
$
401

 
$
477

 
$
1,125

 
$
1,392

Denominator (Thousands of shares)
 
 
 
 
 
 
 
Weighted average shares outstanding
285,253

 
291,664

 
287,179

 
292,597

Shares earned and issuable under compensation plans
398

 
506

 
399

 
506

Weighted average shares used in basic earnings per share
285,651

 
292,170

 
287,578

 
293,103

Effect of dilutive securities
 
 
 
 
 
 
 
Stock options and awards
1,660

 
3,069

 
2,257

 
3,137

Weighted average shares used in diluted earnings per share
287,311

 
295,239

 
289,835

 
296,240

Basic Earnings Per Share
$
1.40

 
$
1.63

 
$
3.91

 
$
4.75

Diluted Earnings Per Share
$
1.40

 
$
1.62

 
$
3.88

 
$
4.70

Stock options of 3,893,857 and 2,712,895 were antidilutive and therefore excluded in the computation of diluted earnings per share for the quarter and nine months ended September 30, 2015, respectively. There were no antidilutive shares for the quarter and nine months ended September 30, 2014.

18


9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 30, 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 3)
15

 
13

 

 

 

 
28

Purchase adjustments & other
1

 

 

 

 

 
1

Foreign currency translation
(30
)
 
(60
)
 
(54
)
 
(2
)
 
(7
)
 
(153
)
Balance, September 30, 2015
$
2,125

 
$
100

 
$
600

 
$
36

 
$
136

 
$
2,997

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 2015 test completed last quarter, Praxair applied the FASB's accounting guidance (refer to Note 1 to the consolidated financial statements of Praxair's 2014 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, 2015.
Changes in the carrying amounts of other intangibles for the nine months ended September 30, 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 3)
9

 
1

 

 
10

Foreign currency translation
(17
)
 
(1
)
 

 
(18
)
Other
1

 

 

 
1

Balance, September 30, 2015
$
686

 
$
37

 
$
47

 
$
770

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2014
$
(147
)
 
$
(18
)
 
$
(9
)
 
$
(174
)
Amortization expense
(25
)
 
(4
)
 
(3
)
 
(32
)
Foreign currency translation
6

 

 

 
6

Other
(3
)
 

 

 
(3
)
Balance, September 30, 2015
$
(169
)
 
$
(22
)
 
$
(12
)
 
$
(203
)
Net balance at September 30, 2015
$
517

 
$
15

 
$
35

 
$
567


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
$
12

2016
44

2017
39

2018
35

2019
33

Thereafter
404

 
$
567


19


10. Share-Based Compensation
Share-based compensation of $8 million ($6 million after-tax) and $14 million ($10 million after-tax) was recognized during the quarters ended September 30, 2015 and 2014, respectively. Share-based compensation of $25 million ($18 million after-tax) and $42 million ($29 million after-tax) was recognized during the nine months ended September 30, 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 nine months ended September 30, 2015 was $11.99 ($14.62 in 2014) based on the Black-Scholes Options-Pricing model. The decrease in grant date fair value year-over-year is primarily attributable to a decrease in volatility.

The following weighted-average assumptions were used to value the grants in 2015 and 2014 :
 
Nine Months Ended September 30,
 
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 September 30, 2015 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, 2015
10,981

 
$
89.02

 
 
 
 
Granted
1,567

 
128.38

 
 
 
 
Exercised
(975
)
 
63.81

 
 
 
 
Cancelled or Expired
(109
)
 
124.93

 
 
 
 
Outstanding at September 30, 2015
11,464

 
96.20

 
5.3
 
$
159

Exercisable at September 30, 2015
8,754

 
$
87.02

 
4.3
 
$
159

The aggregate intrinsic value represents the difference between the company’s closing stock price of $101.86 as of September 30, 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 and nine months ended September 30, 2015 was $6 million and $57 million, respectively ($14 million and $78 million during the same periods in 2014, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and nine months ended September 30, 2015 was $9 million and $60 million ($12 million and $73 million for the same time periods in 2014). The cash tax benefit realized from share-based compensation totaled $2 million and $31 million for the quarter and nine months ended September 30, 2015, of which $18 million in excess tax benefits was classified as financing cash flows for the nine months ended September 30, 2015 ($5 million and $44 million cash tax benefit for the same periods in 2014 of which $28 million represented excess tax benefit for the nine months ended September 30, 2014).
As of September 30, 2015, $22 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1.7 years.
Performance-Based and Restricted Stock Awards
During the nine months ended September 30, 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

20


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, 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 nine months ended September 30, 2015 was $120.04 and $120.32, ($121.16 and $122.73 for the same periods 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 September 30, 2015 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, 2015
833

 
$
109.09

 
307

 
$
106.63

Granted*
215

 
120.04

 
83

 
120.32

Vested
(225
)
 
103.16

 
(94
)
 
107.27

Cancelled
(33
)
 
115.34

 
(24
)
 
112.33

Non-vested at September 30, 2015
790

 
$
114.43

 
272

 
$
112.32


* 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 15 thousand performance-based shares and 21 thousand restricted stock shares that are non-vested at September 30, 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 September 30, 2015, based on current estimates of future performance, $27 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2018 and $16 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2018.
11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters and nine-months ended September 30, 2015 and 2014 are shown below:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
Pensions
 
OPEB
 
Pensions
 
OPEB
(Millions of dollars)
2015
 
2014
 
2015
 
2014
 
2015
 
2014
 
2015
 
2014
Service cost
$
13

 
$
13

 
$

 
$
1

 
$
41

 
$
39

 
$
2

 
$
3

Interest cost
28

 
31

 
2

 
3

 
85

 
93

 
6

 
9

Expected return on plan assets
(38
)
 
(40
)
 

 

 
(116
)
 
(120
)
 

 

Net amortization and deferral
20

 
15

 

 
(3
)
 
61

 
46

 
(2
)
 
(7
)
Net periodic benefit cost before pension settlement charge
$
23

 
$
19

 
$
2

 
$
1

 
$
71

 
$
58

 
$
6

 
$
5

Pension settlement charge (Note 2)
7

 

 

 

 
7

 

 

 

Net periodic benefit cost
$
30

 
$
19

 
$
2

 
$
1

 
$
78

 
$
58

 
$
6

 
$
5

Praxair estimates that 2015 required contributions to its pension plans will be in the area of $15 million, of which $13 million have been made through September 30, 2015.

21


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 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, and (ii) the amount of tax reductions available under the Refis Program. 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, 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 $160 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$554 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$428 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.
On September 14, 2015, the Ninth Federal Court of Brasilia overturned the fine against White Martins and declared the original CADE administrative proceeding to be null and void. We expect CADE to appeal this decision to the Federal Circuit Court in Brasilia. On September 21, 2015, White Martins submitted a motion to the Ninth Federal Court in Brasilia requesting approval to withdraw the guarantee which was securing the fine.
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.

22


13. Segments
Sales and operating profit by segment for the quarter and nine months ended September 30, 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 September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2015
 
2014
 
2015
 
2014
SALES(a) 
 
 
 
 
 
 
 
North America
$
1,463

 
$
1,639

 
$
4,444

 
$
4,847

Europe
338

 
385

 
995

 
1,190

South America
343

 
523

 
1,132

 
1,520

Asia
395

 
426

 
1,153

 
1,212

Surface Technologies
147

 
171

 
457

 
514

Total sales
$
2,686

 
$
3,144

 
$
8,181

 
$
9,283

  
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2015
 
2014
 
2015
 
2014
OPERATING PROFIT
 
 
 
 
 
 
 
North America
$
385

 
$
416

 
$
1,152

 
$
1,192

Europe
63

 
71

 
188

 
228

South America
70

 
118

 
236

 
344

Asia
77

 
75

 
215

 
226

Surface Technologies
25

 
31

 
78

 
93

Segment operating profit
620

 
711

 
1,869

 
2,083

Cost reduction program and other charges (Note 2)
(26
)
 

 
(172
)
 

Total operating profit
$
594

 
$
711

 
$
1,697

 
$
2,083

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


23



14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters ended September 30, 2015 and 2014 is provided below:

Quarter Ended September 30,
(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
$
4,964

 
$
380

 
$
5,344

 
$
6,911

 
$
395

 
$
7,306

Net income (a)
401

 
10

 
411

 
477

 
12

 
489

Other comprehensive income (loss)
(714
)
 
(9
)
 
(723
)
 
(566
)
 
(16
)
 
(582
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions) (b)

 
1

 
1

 

 
4

 
4

Dividends and other capital changes

 
(2
)
 
(2
)
 

 
(7
)
 
(7
)
Redemption value adjustments
(1
)
 

 
(1
)
 

 

 

Dividends to Praxair, Inc. common stock holders ($0.715 per share in 2015 and $0.65 per share in 2014)
(204
)
 

 
(204
)
 
(189
)
 

 
(189
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
3

 

 
3

 
2

 

 
2

For employee savings and incentive plans
13

 

 
13

 
17

 

 
17

Purchases of common stock
(207
)
 

 
(207
)
 
(118
)
 

 
(118
)
Tax benefit from share-based compensation
1

 

 
1

 
4

 

 
4

Share-based compensation
8

 

 
8

 
14

 

 
14

Balance, end of period
$
4,264

 
$
380

 
$
4,644

 
$
6,552

 
$
388

 
$
6,940


24


 
 
 
 
 
 
 
 
 
 
 
 
 
Nine Months Ended September 30,
(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)
1,125

 
27

 
1,152

 
1,392

 
32

 
1,424

Other comprehensive loss
(1,271
)
 
(23
)
 
(1,294
)
 
(430
)
 
(17
)
 
(447
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions) (b)

 
3

 
3

 
(24
)
 
7

 
(17
)
Dividends and other capital changes

 
(14
)
 
(14
)
 

 
(28
)
 
(28
)
Redemption value adjustments
(5
)
 

 
(5
)
 
(1
)
 

 
(1
)
Dividends to Praxair, Inc. common stock holders ($2.145 per share in 2015 and $1.95 per share in 2014)
(616
)
 

 
(616
)
 
(570
)
 

 
(570
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
6

 

 
6

 
5

 

 
5

For employee savings and incentive plans
57

 

 
57

 
69

 

 
69

Purchases of common stock
(698
)
 

 
(698
)
 
(568
)
 

 
(568
)
Tax benefit from share-based compensation
18

 

 
18

 
28

 

 
28

Share-based compensation
25

 

 
25

 
42

 

 
42

Balance, end of period
$
4,264

 
$
380

 
$
4,644

 
$
6,552

 
$
388

 
$
6,940


(a)
Net income for noncontrolling interests excludes Net income related to redee