10-Q 1 px-q2201710q.htm PRAXAIR, INC. 2017 SECOND QUARTER FORM 10-Q Document

 
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 June 30, 2017
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.)
 
 
10 Riverview Drive, DANBURY, CT
 
06810-6268
(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)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class: Registered on:
Common Stock ($0.01 par value) New York Stock Exchange
1.50% Euro notes due 2020 New York Stock Exchange
1.20% Euro notes due 2024 New York Stock Exchange
1.625% Euro notes due 2025 New York Stock Exchange
Securities registered pursuant to Section 12(g) of the Act: None
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, a smaller reporting company, or an emerging growth company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
ý
Accelerated filer
 
¨
 
 
 
 
Non-accelerated filer
 
¨
Smaller reporting company
 
¨
 
 
 
Emerging growth company
 
¨


If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 
¨
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 June 30, 2017, 286,024,310 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED) 
 
Quarter Ended June 30,
 
2017
 
2016
SALES
$
2,834

 
$
2,665

Cost of sales, exclusive of depreciation and amortization
1,598

 
1,468

Selling, general and administrative
308

 
308

Depreciation and amortization
292

 
281

Research and development
23

 
24

Transaction costs and other charges
15

 

Other income (expense) - net
6

 
4

OPERATING PROFIT
604

 
588

Interest expense - net
38

 
44

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
566

 
544

Income taxes
157

 
146

INCOME BEFORE EQUITY INVESTMENTS
409

 
398

Income from equity investments
11

 
11

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
420

 
409

Less: noncontrolling interests
(14
)
 
(10
)
NET INCOME - PRAXAIR, INC.
$
406

 
$
399

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.42

 
$
1.40

Diluted earnings per share
$
1.41

 
$
1.39

Cash dividends per share
$
0.7875

 
$
0.75

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
286,090

 
285,702

Diluted shares outstanding
288,535

 
287,727

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)
 
 
Six months ended June 30,
 
2017
 
2016
SALES
$
5,562

 
$
5,174

Cost of sales, exclusive of depreciation and amortization
3,143

 
2,849

Selling, general and administrative
587

 
582

Depreciation and amortization
579

 
553

Research and development
46

 
47

Transaction costs and other charges

21

 

Other income (expense) - net

 
(1
)
OPERATING PROFIT
1,186

 
1,142

Interest expense - net
79

 
109

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
1,107

 
1,033

Income taxes
306

 
279

INCOME BEFORE EQUITY INVESTMENTS
801

 
754

Income from equity investments
23

 
21

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
824

 
775

Less: noncontrolling interests
(29
)
 
(20
)
NET INCOME - PRAXAIR, INC.
$
795

 
$
755

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
2.78

 
$
2.64

Diluted earnings per share
$
2.76

 
$
2.63

Cash dividends per share
$
1.575

 
$
1.50

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
285,799

 
285,566

Diluted shares outstanding
288,067

 
287,426

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 June 30,
 
2017
 
2016
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
420

 
$
409

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(1
)
 
97

Income taxes
55

 
(27
)
Translation adjustments
54

 
70

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(17
)
 
(19
)
Reclassifications to net income
16

 
15

Income taxes
1

 
2

Funded status - retirement obligations

 
(2
)
Derivative instruments (Note 6):
 
 
 
Current quarter unrealized gain (loss)
1

 

Reclassifications to net income

 
(1
)
Income taxes
(1
)
 
1

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
54

 
68

 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
474

 
477

Less: noncontrolling interests
(27
)
 
(2
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
447

 
$
475

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


5


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Six Months Ended June 30,
 
2017
 
2016
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
824

 
$
775

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
 Foreign currency translation adjustments
316

 
439

 Income taxes
58

 
(11
)
Translation adjustments
374

 
428

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(20
)
 
(24
)
Reclassifications to net income
20

 
29

Income taxes

 
(3
)
Funded status - retirement obligations

 
2

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

 

Reclassifications to net income

 
(1
)
Income taxes

 
1

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
374

 
430

 
 
 
 
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)
1,198

 
1,205

Less: noncontrolling interests
(47
)
 
(28
)
COMPREHENSIVE INCOME - PRAXAIR, INC.
$
1,151

 
$
1,177

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


6


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
June 30, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
535

 
$
524

Accounts receivable - net
1,791

 
1,641

Inventories
568

 
550

Prepaid and other current assets
225

 
165

TOTAL CURRENT ASSETS
3,119

 
2,880

Property, plant and equipment (less accumulated depreciation of $13,204 in 2017 and $12,444 in 2016)
11,806

 
11,477

Goodwill
3,182

 
3,117

Other intangible assets - net
568

 
583

Other long-term assets
1,290

 
1,275

TOTAL ASSETS
$
19,965

 
$
19,332

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
900

 
$
906

Short-term debt
280

 
434

Current portion of long-term debt
910

 
164

Other current liabilities
953

 
974

TOTAL CURRENT LIABILITIES
3,043

 
2,478

Long-term debt
8,177

 
8,917

Other long-term liabilities
2,475

 
2,485

TOTAL LIABILITIES
13,695

 
13,880

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests (Note 14)
10

 
11

Praxair, Inc. Shareholders’ Equity:
 
 
 
Common stock $0.01 par value, authorized - 800,000,000 shares, issued 2017 and 2016 - 383,230,625 shares
4

 
4

Additional paid-in capital
4,076

 
4,074

Retained earnings
13,223

 
12,879

Accumulated other comprehensive income (loss) (Note 14)
(4,244
)
 
(4,600
)
Less: Treasury stock, at cost (2017 - 97,206,315 shares and 2016 - 98,329,849 shares)
(7,252
)
 
(7,336
)
Total Praxair, Inc. Shareholders’ Equity
5,807

 
5,021

Noncontrolling interests
453

 
420

TOTAL EQUITY
6,260

 
5,441

TOTAL LIABILITIES AND EQUITY
$
19,965

 
$
19,332

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)
 
 
Six months ended June 30,
 
2017
 
2016
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
795

 
$
755

Noncontrolling interests
29

 
20

Net income (including noncontrolling interests)
824

 
775

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Transaction costs and other charges, net of payments
17

 

Depreciation and amortization
579

 
553

Deferred income taxes
48

 
4

Share-based compensation
28

 
22

Working capital:
 
 
 
Accounts receivable
(95
)
 
(61
)
Inventory
(5
)
 
(8
)
Prepaid and other current assets
(40
)
 
2

Payables and accruals
(24
)
 
(63
)
Pension contributions
(6
)
 
(6
)
Long-term assets, liabilities and other
85

 
41

Net cash provided by operating activities
1,411

 
1,259

INVESTING
 
 
 
Capital expenditures
(652
)
 
(680
)
Acquisitions, net of cash acquired
(2
)
 
(325
)
Divestitures and asset sales
17

 
8

Net cash used for investing activities
(637
)
 
(997
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
(157
)
 
508

Long-term debt borrowings
10

 
908

Long-term debt repayments
(158
)
 
(726
)
Issuances of common stock
70

 
60

Purchases of common stock
(11
)
 
(83
)
Cash dividends - Praxair, Inc. shareholders
(450
)
 
(428
)
Noncontrolling interest transactions and other
(84
)
 
(109
)
Net cash provided by (used for) financing activities
(780
)
 
130

Effect of exchange rate changes on cash and cash equivalents
17

 
28

Change in cash and cash equivalents
11

 
420

Cash and cash equivalents, beginning-of-period
524

 
147

Cash and cash equivalents, end-of-period
$
535

 
$
567

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 2016 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2017.
Accounting Standards Implemented in 2017
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, previously inventory was measured at the lower of cost or market. The adoption of this guidance resulted in no material impact.
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 requires expanded disclosures. Subsequently, the FASB has issued amendments to certain aspects of the guidance including the effective date. 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.
The Company is currently in the process of evaluating and implementing this new guidance, as required, and at this time expects to use the modified retrospective basis starting in 2018. Praxair will provide additional updates in future filings, as appropriate.
Leases – In February 2016, the FASB issued updated guidance on the accounting and financial statement presentation of leases. The new guidance requires lessees to recognize a right-of-use asset and lease liability for all leases, except those that meet certain scope exceptions, and would require expanded quantitative and qualitative disclosures. This guidance will be effective for Praxair beginning in the first quarter 2019, with early adoption optional, and requires companies to transition using a modified retrospective approach. 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 appropriate.
Credit Losses on Financial Instruments In June 2016, the FASB issued an update on the measurement of credit losses. The guidance introduces a new accounting model for expected credit losses on financial instruments, including trade receivables, based on estimates of current expected credit losses. This guidance will be effective for Praxair beginning in the first quarter 2020, with early adoption permitted beginning in the first quarter 2019 and requires companies to apply the change in accounting on a prospective basis. We are currently evaluating the impact this update will have on our consolidated financial statements.
Classification of Certain Cash Receipts and Cash Payments – In August 2016, the FASB issued updated guidance on the classification of certain cash receipts and cash payments within the statement of cash flows. The update provides accounting guidance for specific cash flow issues with the objective of reducing diversity in practice. This new guidance will be effective for Praxair beginning in the first quarter 2018 on a retrospective basis, with early adoption optional. Praxair does not expect this requirement to have a material impact.
Intra-Entity Asset Transfers – In October 2016, the FASB issued updated guidance for income tax accounting of intra-entity transfers of assets other than inventory. The update requires an entity to recognize the income tax consequences of an intra-entity transfer of an asset other than inventory in the period when the transfer occurs. This new guidance will be effective for Praxair beginning in the first quarter 2018, with early adoption permitted, and should be applied on a modified retrospective basis. We are currently evaluating the impact this update will have on our consolidated financial statements.
Simplifying the Test for Goodwill Impairment – In January 2017, the FASB issued updated guidance on the measurement of goodwill. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. The guidance will be effective for Praxair beginning in the

10


first quarter 2020 with early adoption permitted. Praxair does not expect this guidance to have a material impact.
Pension Costs - In March 2017, the FASB issued updated guidance on the presentation of net periodic pension cost and net periodic postretirement benefit cost. The new guidance requires the service cost component be reported in the same line item or items as other compensation costs arising from services rendered by employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and not included within operating profit. This guidance will be effective for Praxair beginning in the first quarter 2018, with early adoption optional, and requires companies to transition using a retrospective approach for the presentation of the service cost component and the other cost components and prospectively for the capitalization of the service cost component. Praxair is currently evaluating the impact this update will have on our consolidated financial statements.
Reclassifications – Certain prior years’ amounts have been reclassified to conform to the current year’s presentation, including reclassifications to the condensed consolidated statement of cash flows due to the adoption of the share-based payment accounting standard adopted in the second quarter of 2016.
2. Transaction Costs and Other Charges
2017 Transaction Costs
On June 1, 2017 Praxair and Linde AG ("Linde") entered into a business combination agreement, pursuant to which they agreed to combine their respective businesses subject to shareholder and regulatory approvals (see Note 15). In connection with the intended business combination, Praxair incurred transaction costs which totaled $15 million and $21 million for the quarter and six months ended June 30, 2017 ($15 million and $21 million after-tax, or $0.05 and $0.07 per diluted share), respectively.

Classification in the condensed consolidated financial statements
The costs are shown within operating profit in a separate line item on the consolidated statements of income. On the condensed consolidated statement of cash flows, the impact of these costs, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 13 - Segments, Praxair excluded these costs from its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the segment operating profit table.
 
2016 and 2015 Cost Reduction Programs and Other Charges
In the third quarter of 2016, Praxair recorded pre-tax charges totaling $96 million ($63 million after-tax and noncontrolling interests or $0.22 per diluted share). During 2015, Praxair recorded pre-tax charges totaling $165 million ($125 million after-tax and noncontrolling interests, or $0.43 per diluted share).

Reconciliation

The following table summarizes the activities related to the company's cost reduction programs for the six months ended June 30, 2017:
(millions of dollars)
Severance costs
 
Other Charges
 
Total
Balance, January 1, 2017
$
38

 
$
27

 
$
65

Less: Cash payments
(13
)
 
(3
)
 
(16
)
Less: Non-cash charges

 

 

Foreign currency translation
2

 

 
2

Balance, June 30, 2017
$
27

 
$
24

 
$
51

2016 Bond Redemption Charge
In February 2016, Praxair redeemed $325 million of 5.20% notes due March 2017 resulting in a $16 million interest charge ($10 million after-tax, or $0.04 per diluted share).

11


For further details regarding the cost reduction program and other charges, refer to Note 2 to the consolidated financial statements of Praxair's 2016 Annual Report on Form 10-K.
3. Acquisitions
2016 Acquisitions

During the six months ended June 30, 2016, Praxair had acquisitions totaling $325 million, primarily the acquisition of Yara International ASA's European carbon dioxide business ("European CO2 business") and packaged gases businesses in North America and Europe. These transactions resulted in goodwill and other intangible assets of $118 million and $72 million, respectively. In addition, Praxair purchased a remaining 34% share in a Scandinavian joint venture for $104 million.

European CO2 Acquisition

On June 1, 2016 Praxair, Inc. completed an acquisition of a European CO2 business, which is a leading supplier of liquid CO2 and dry ice primarily to the European food and beverage industries. The business operates CO2 liquefaction plants and dry ice production facilities across the UK, Ireland, Norway, Denmark, Germany, Netherlands, Belgium, France and Italy. This acquisition was accounted for as a business combination; accordingly, the results of operations were consolidated from June 1, 2016 in the European business segment.

The purchase price for the acquisition was approximately $230 million (€206 million) and resulted in $121 million of intangible assets. The intangible assets primarily consist of $69 million of goodwill and $51 million of customer relationships that will be amortized over their estimated useful life of 20 years.

4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
June 30,
2017
 
December 31,
2016
Inventories
 
 
 
Raw materials and supplies
$
195

 
$
197

Work in process
54

 
45

Finished goods
319

 
308

Total inventories
$
568

 
$
550


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 $48 million and $46 million at June 30, 2017 and December 31, 2016, respectively. These amounts are net of reserves of $51 million and $50 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.


12


5. Debt
The following is a summary of Praxair’s outstanding debt at June 30, 2017 and December 31, 2016:
(Millions of dollars)
June 30,
2017
 
December 31,
2016
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
222

 
$
333

Other bank borrowings (primarily international)
58

 
101

Total short-term debt
280

 
434

LONG-TERM (a)
 
 
 
U.S. borrowings (U.S. dollar denominated unless otherwise noted)
 
 
 
Floating Rate Notes due 2017 (b)

 
150

1.05% Notes due 2017
400

 
400

1.20% Notes due 2018
499

 
499

1.25% Notes due 2018 (c)
478

 
478

4.50% Notes due 2019
598

 
598

1.90% Notes due 2019
499

 
499

1.50% Euro-denominated notes due 2020
682

 
627

2.25% Notes due 2020
299

 
299

4.05% Notes due 2021
497

 
497

3.00% Notes due 2021
496

 
496

2.45% Notes due 2022
597

 
597

2.20% Notes due 2022
498

 
498

2.70% Notes due 2023
497

 
497

1.20% Euro-denominated notes due 2024
626

 
575

2.65% Notes due 2025
397

 
397

1.625% Euro-denominated notes due 2025
565

 
519

3.20% Notes due 2026
725

 
725

3.55% Notes due 2042
662

 
662

Other
12

 
12

International bank borrowings
56

 
49

Obligations under capital leases
4

 
7

 
9,087

 
9,081

Less: current portion of long-term debt
(910
)
 
(164
)
Total long-term debt
8,177

 
8,917

Total debt
$
9,367

 
$
9,515

 
(a)
Amounts are net of unamortized discounts, premiums and/or debt issuance costs as applicable.
(b)
In February 2017, Praxair repaid $150 million of floating rate notes that became due.
(c)
June 30, 2017 and December 31, 2016 include a $2 million and $4 million fair value increase, respectively, related to hedge accounting. See Note 6 for additional information.

In June 2017, the company entered into a $500 million 364-day revolving credit facility with a syndicate of banks which expires in June 2018. The credit facility is with major financial institutions and is non-cancelable by the issuing financial institution until maturity. The only financial covenant requires Praxair not to exceed a maximum 70% leverage ratio, which is consistent with the company's $2.5 billion senior unsecured credit facility (see Note 11 to the consolidated financial statements of Praxair's 2016 Annual Report on Form 10-K). No borrowings were outstanding under the credit agreement at June 30, 2017.


13


6. Financial Instruments
In its normal operations, Praxair is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Praxair is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Praxair routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Praxair only uses commonly traded and non-leveraged instruments.
There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.
Counterparties to Praxair’s derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at June 30, 2017 and December 31, 2016 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,206

 
$
2,104

 
$
27

 
$
11

 
$
10

 
$
18

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

 
$
38

 
$

 
$
3

 
$

 
$

       Forecasted purchases (a)
9

 

 
1

 

 

 

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (b)
475

 
475

 
2

 
4

 

 

Total Hedges
$
522

 
$
513

 
$
3

 
$
7

 
$

 
$

Total Derivatives
$
2,728

 
$
2,617

 
$
30

 
$
18

 
$
10

 
$
18

 
(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

14


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

In 2014 Praxair designated the €600 million ($682 million as of June 30, 2017) 1.50% Euro-denominated notes due 2020 and the €500 million ($565 million as of June 30, 2017) 1.625% Euro-denominated notes due 2025, as a hedge of the net investment position in its European operations. In 2016 Praxair designated an incremental €550 million ($626 million as of June 30, 2017) 1.20% Euro-denominated notes due 2024 as an additional 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 hedge inception, exchange rate movements have reduced long-term debt by $189 million (long-term debt increased by $150 million during the first six months of 2017), with the offsetting gain shown within the cumulative translation component of AOCI in the condensed consolidated balance sheets and the consolidated statements of comprehensive income.
Interest Rate Contracts
Outstanding Interest Rate Swaps
At June 30, 2017, 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 June 30, 2017, $2 million was recognized as an increase in the fair value of these notes ($4 million at December 31, 2016).

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)
June 30,
2017
 
December 31,
2016
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
)
 
(5
)
 
(5
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
4

 
4

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

 
1

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




15


The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
 
Amount of Pre-Tax Gain (Loss)
Recognized in Earnings *
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
 
 
 
 
 
 
 
Debt-related
$
30

 
$
16

 
$
109

 
$
83

Other balance sheet items
1

 
1

 
2

 
3

Total
$
31

 
$
17

 
$
111

 
$
86


* 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)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$

 
$

 
$

 
$

Net investment hedge

 

 

 

Forecasted purchases
1

 

 

 

Interest rate contracts:
 
 
 
 
 
 
 
Treasury rate lock contracts

 

 

 
(1
)
Total - pre tax
$
1

 
$

 
$

 
$
(1
)
Less: income taxes
(1
)
 

 

 
1

Total - Net of Taxes
$

 
$

 
$

 
$

 
Six 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)
June 30,
2017
 
June 30,
2016
 
June 30,
2017
 
June 30,
2016
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$
(1
)
 
$

 
$

 
$

Net investment hedge

 
(4
)
 

 

Forecasted purchases
1

 

 

 

Interest rate contracts:
 
 
 
 
 
 
 
Treasury rate lock contracts

 

 

 
(1
)
Total - pre tax
$

 
$
(4
)
 
$

 
$
(1
)
Less: income taxes

 
1

 

 
1

Total - Net of Taxes
$

 
$
(3
)
 
$

 
$

**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 treasury rate locks are recorded as a

16


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 2017 or 2016. 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 approximately $1 million are expected to be reclassified to earnings during the next twelve months.

7. Fair Value Disclosures
The fair value hierarchy prioritizes the input to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
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)
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
 
June 30,
2017
 
December 31,
2016
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
30

 
$
18

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
10

 
$
18

 

 

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 June 30, 2017, the estimated fair value of Praxair’s long-term debt portfolio was $9,273 million versus a carrying value of $9,087 million. At December 31, 2016, the estimated fair value of Praxair’s long-term debt portfolio was $9,218 million versus a carrying value of $9,081 million. Differences from carrying amounts are attributable to interest-rate changes subsequent to when the debt was issued.

17



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 June 30,
 
 
Six Months Ended June 30,
 
2017
 
2016
 
 
2017
 
2016
Numerator (Millions of dollars)
 
 
 
 
 
 
 
 
Net income - Praxair, Inc.
$
406

 
$
399

 
 
$
795

 
$
755

Denominator (Thousands of shares)
 
 
 
 
 
 
 
 
Weighted average shares outstanding
285,719

 
285,314

 
 
285,429

 
285,182

Shares earned and issuable under compensation plans
371

 
388

 
 
370

 
384

Weighted average shares used in basic earnings per share
286,090

 
285,702

 
 
285,799

 
285,566

Effect of dilutive securities
 
 
 
 
 
 
 
 
Stock options and awards
2,445

 
2,025

 
 
2,268

 
1,860

Weighted average shares used in diluted earnings per share
288,535

 
287,727

 
 
288,067

 
287,426

Basic Earnings Per Share
$
1.42

 
$
1.40

 
 
$
2.78

 
$
2.64

Diluted Earnings Per Share
$
1.41

 
$
1.39

 
 
$
2.76

 
$
2.63

Stock options of 2,508,472 and 2,509,162 for quarter and six months ended June 30, 2017 and stock options of 2,637,160 and 5,174,451 for the quarter and six months ended June 30, 2016 were antidilutive and therefore excluded in the computation of diluted earnings per share.
9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June 30, 2017 were as follows:
(Millions of dollars)
North
America
 
South
America
 
Europe
 
Asia
 
Surface
Technologies
 
Total
Balance, December 31, 2016
$
2,165

 
$
132

 
$
629

 
$
58

 
$
133

 
$
3,117

Acquisitions

 

 

 

 

 

Purchase adjustments & other

 
1

 
1

 

 

 
2

Foreign currency translation
16

 
(2
)
 
42

 
1

 
6

 
63

Balance, June 30, 2017
$
2,181

 
$
131

 
$
672

 
$
59

 
$
139

 
$
3,182


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 2017 test completed this quarter, Praxair applied the FASB's accounting guidance (refer to Note 1 to the consolidated financial statements of Praxair's 2016 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 June 30, 2017.
Changes in the carrying amounts of other intangibles for the six months ended June 30, 2017 were as follows:

18


(Millions of dollars)
Customer &
License/Use
Agreements
 
Non-compete
Agreements
 
Patents &
Other
 
Total
Cost:
 
 
 
 
 
 
 
Balance, December 31, 2016
$
751

 
$
34

 
$
51

 
$
836

Additions
1

 

 

 
1

Foreign currency translation
15

 

 
1

 
16

Other*
(3
)
 
(8
)
 

 
(11
)
Balance, June 30, 2017
$
764

 
$
26

 
$
52

 
$
842

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2016
$
(214
)
 
$
(22
)
 
$
(17
)
 
$
(253
)
Amortization expense
(20
)
 
(2
)
 
(2
)
 
(24
)
Foreign currency translation
(7
)
 

 

 
(7
)
Other*
2

 
8

 

 
10

Balance, June 30, 2017
$
(239
)
 
$
(16
)
 
$
(19
)
 
$
(274
)
Net balance at June 30, 2017
$
525

 
$
10

 
$
33

 
$
568


* Other primarily relates to 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 17 years.
Total estimated annual amortization expense is as follows:
(Millions of dollars)
 
Remaining 2017
$
25

2018
47

2019
45

2020
43

2021
41

Thereafter
367

 
$
568

10. Share-Based Compensation
Share-based compensation of $16 million ($1 million after-tax) and $14 million (less than $1 million after-tax) was recognized during the quarters ended June 30, 2017 and 2016, respectively. The 2017 and 2016 quarters both include$10 million of excess tax benefits. Share-based compensation of $28 million ($5 million after-tax) and $22 million ($6 million after-tax) was recognized during the six months ended June 30, 2017 and 2016, respectively. The 2017 and 2016 six-month periods include $14 million and $10 million, respectively, of excess tax benefits. 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 2016 Annual Report on Form 10-K.
Stock Options
The weighted-average fair value of options granted during the six months ended June 30, 2017 was $12.40 ($8.91 in 2016) based on the Black-Scholes Options-Pricing model. The increase in grant date fair value year-over-year was primarily attributable to an increase in the company's stock price.

19



The following weighted-average assumptions were used to value the grants in 2017 and 2016:
 
Six months ended June 30,
 
2017
 
2016
Dividend yield
2.7
%
 
2.9
%
Volatility
14.0
%
 
14.4
%
Risk-free interest rate
2.13
%
 
1.41
%
Expected term years
6

 
6

The following table summarizes option activity under the plans as of June 30, 2017 and changes during the six-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, 2017
11,708

 
$
101.58

 
 
 
 
Granted
2,090

 
118.71

 
 
 
 
Exercised
(1,588
)
 
86.31

 
 
 
 
Cancelled or Expired
(90
)
 
112.99

 
 
 
 
Outstanding at June 30, 2017
12,120

 
106.45

 
6.2
 
$
316

Exercisable at June 30, 2017
8,051

 
$
102.85

 
4.8
 
$
239

The aggregate intrinsic value represents the difference between the company’s closing stock price of $132.55 as of June 30, 2017 and the exercise price multiplied by the number of in the money options outstanding as of that date. The total intrinsic value of stock options exercised during the quarter and six-months ended June 30, 2017 was $45 million and $63 million, respectively ($18 million and $41 million during the same periods in 2016, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and six-months ended June 30, 2017 was $44 million and $63 million, respectively ($29 million and $59 million for the same periods in 2016, respectively). The cash tax benefit realized from share-based compensation totaled $18 million and $26 million for the quarter and six-months ended June 30, 2017 ($6 million and $19 million for the same periods in 2016, respectively).
As of June 30, 2017, $29 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 six months ended June 30, 2017, the company granted performance-based stock awards to employees of 223,630 shares that vest, subject to the attainment of pre-established minimum performance criteria, principally on the third anniversary of their date of grant. These awards are tied to either return on capital ("ROC") performance or relative total shareholder return ("TSR") performance versus that of the S&P 500. 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 for ROC awards will be adjusted during the three-year performance period based upon the estimated performance levels that will be achieved. TSR awards are measured at their grant date fair value and not subsequently re-measured.
During the six months ended June 30, 2017, the company also granted restricted stock units to employees of 81,853 shares. 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 ROC performance-based stock awards and restricted stock units granted during the six months ended June 30, 2017 was $109.68 and $111.69, respectively ($93.46 and $97.95 for the same periods in 2016, respectively). These fair values are 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.

20


The weighted-average fair value of performance-based stock tied to relative TSR performance granted during the six months ended June 30, 2017 was $124.12 ($124.18 in 2016), and was estimated using a Monte Carlo simulation performed as of the grant date.
The following table summarizes non-vested performance-based and restricted stock award activity as of June 30, 2017 and changes during the six 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, 2017
714

 
$
115.72

 
274

 
$
109.49

Granted
224

 
114.82

 
82

 
111.69

Vested
(76
)
 
121.16

 
(81
)
 
118.48

Cancelled and Forfeited
(190
)
 
113.83

 
(5
)
 
109.92

Non-vested at June 30, 2017
672

 
$
113.40

 
270

 
$
107.46

There are approximately 9 thousand performance-based shares and 6 thousand restricted stock shares that are non-vested at June 30, 2017 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 June 30, 2017, based on current estimates of future performance, $30 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2020 and $15 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2020.
11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and six months ended June 30, 2017 and 2016 are shown below:
 
 
Quarter Ended June 30,
 
Six Months Ended June 30,
 
Pensions
 
OPEB
 
Pensions
 
OPEB
(Millions of dollars)
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
12

 
$
12

 
$
1

 
$
1

 
$
23

 
$
24

 
$
2

 
$
2

Interest cost
25

 
25

 
1

 
1

 
51

 
49

 
2

 
2

Expected return on plan assets
(40
)
 
(39
)
 

 

 
(80
)
 
(78
)
 

 

Net amortization and deferral
17

 
16

 
(1
)
 
(1
)
 
34

 
31

 
(2
)
 
(2
)
Curtailment gain (1)

 

 

 

 

 

 
(18
)
 

Net periodic benefit cost
$
14

 
$
14

 
$
1

 
$
1

 
$
28

 
$
26

 
$
(16
)
 
$
2

(1) The curtailment gain recorded during the six months ended June 30, 2017 resulted from the termination of an OPEB plan in South America in the first quarter.
Praxair estimates that 2017 required contributions to its pension plans will be in the range of $10 million to $15 million, of which $6 million have been made through June 30, 2017.


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 2016 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. It is difficult to estimate the timing of resolution of legal matters in Brazil.
At June 30, 2017 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 $235 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$665 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$514 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. Initially, 50% of the guarantee was satisfied by letters of credit with a financial institution and 50% by equity of a Brazilian subsidiary. On April 15, 2016, the Ninth Federal Court in Brasilia allowed White Martins to withdraw and cancel the letters of credit. Accordingly, the guarantee is currently satisfied solely 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. On June 30, 2016, CADE filed an appeal against this decision with the Federal Circuit Court in Brasilia.
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 quarters and six months ended June 30, 2017 and 2016 are shown below. For a description of Praxair’s operating segments, refer to Note 18 to the consolidated financial statements of Praxair’s 2016 Annual Report on Form 10-K.
  
Quarter Ended June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
SALES(a) 
 
 
 
 
 
 
 
North America
$
1,505

 
$
1,411

 
$
2,963

 
$
2,764

Europe
383

 
355

 
739

 
675

South America
373

 
358

 
742

 
669

Asia
422

 
393

 
817

 
769

Surface Technologies
151

 
148

 
301

 
297

Total sales
$
2,834

 
$
2,665

 
$
5,562

 
$
5,174

  
Quarter Ended June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
OPERATING PROFIT
 
 
 
 
 
 
 
North America
$
378

 
$
359

 
$
735

 
$
708

Europe
73

 
68

 
139

 
130

South America
63

 
70

 
127

 
125

Asia
80

 
67

 
155

 
130

Surface Technologies
25

 
24

 
51

 
49

Segment operating profit
619

 
588

 
1,207

 
1,142

Transaction costs and other charges (Note 2)
(15
)
 

 
(21
)
 

Total operating profit
$
604

 
$
588

 
$
1,186

 
$
1,142

 
(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 and six months ended June 30, 2017 and 2016 is provided below:

Quarter Ended June 30,
(Millions of dollars)
2017
 
2016
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
5,529

 
$
436

 
$
5,965

 
$
4,888

 
$
417

 
$
5,305

Net income (a)
406

 
13

 
419

 
399

 
10

 
409

Other comprehensive income (loss)
41

 
13

 
54

 
76

 
(6
)
 
70

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
7

 
7

 

 

 

Dividends and other capital changes

 
(16
)
 
(16
)
 

 
(14
)
 
(14
)
Redemption value adjustments

 

 

 
3

 

 
3

Dividends to Praxair, Inc. common stock holders ($0.7875 per share in 2017 and $0.75 per share in 2016)
(225
)
 

 
(225
)
 
(214
)
 

 
(214
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
1

 

 
1

 
2

 

 
2

For employee savings and incentive plans
39

 

 
39

 
23

 

 
23

Purchases of common stock

 

 

 
(51
)
 

 
(51
)
Share-based compensation
16

 

 
16

 
14

 

 
14

Balance, end of period
$
5,807

 
$
453

 
$
6,260

 
$
5,140

 
$
407

 
$
5,547


24


 
Six Months Ended June 30,
(Millions of dollars)
2017
 
2016
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
5,021

 
$
420

 
$
5,441

 
$
4,389

 
$
404

 
$
4,793

Net income (a)
795

 
28

 
823

 
755

 
18

 
773

Other comprehensive income (loss)
356

 
18

 
374

 
422

 
4

 
426

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
7

 
7

 

 

 

Dividends and other capital changes

 
(20
)
 
(20
)
 

 
(19
)
 
(19
)
Redemption value adjustments

 

 

 
3

 

 
3

Dividends to Praxair, Inc. common stock holders ($1.575 per share in 2017 and $1.50 per share in 2016)
(450
)
 

 
(450
)
 
(428
)
 

 
(428
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
3

 

 
3

 
4

 

 
4

For employee savings and incentive plans
54

 

 
54

 
56

 

 
56

Purchases of common stock

 

 

 
(83
)
 

 
(83
)
Share-based compensation
28

 

 
28

 
22

 

 
22

Balance, end of period
$
5,807

 
$
453

 
$
6,260

 
$
5,140

 
$
407

 
$
5,547


(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $1 million for both the quarter and the six months ended June 30, 2017 ($2 million for the six months ended June 30, 2016, all in the first quarter), which is not part of total equity (see redeemable noncontrolling interests section below).
The components of AOCI are as follows:
 
June 30,
 
December 31,
(Millions of dollars)
2017
 
2016
Cumulative translation adjustment - net of taxes:
 
 
 
North America
$
(847
)
 
$
(1,038
)
South America
(2,000
)
 
(1,969
)
Europe
(439
)
 
(504
)
Asia
(273
)
 
(383
)
Surface Technologies
(31
)
 
(52
)
 
(3,590
)
 
(3,946
)
Derivatives - net of taxes
(1
)
 
(1
)
Pension / OPEB funded status obligation (net of $352 million tax benefit at both June 30, 2017 and December 31, 2016)
(653
)
 
(653
)