10-Q 1 px-q3201710q.htm PRAXAIR, INC. 2017 THIRD 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 September 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 September 30, 2017, 286,305,341 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries September 30, 2017 and December 31, 2016 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries Nine Months Ended September 30, 2017 and 2016 (Unaudited)
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED) 
 
Quarter Ended September 30,
 
2017
 
2016
SALES
$
2,922

 
$
2,716

Cost of sales, exclusive of depreciation and amortization
1,652

 
1,533

Selling, general and administrative
304

 
291

Depreciation and amortization
298

 
284

Research and development
23

 
22

Transaction costs and other charges
16

 
100

Other income (expense) - net
(3
)
 
11

OPERATING PROFIT
626

 
497

Interest expense - net
41

 
43

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
585

 
454

Income taxes
162

 
120

INCOME BEFORE EQUITY INVESTMENTS
423

 
334

Income from equity investments
12

 
10

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
435

 
344

Less: noncontrolling interests
(16
)
 
(5
)
NET INCOME - PRAXAIR, INC.
$
419

 
$
339

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.46

 
$
1.19

Diluted earnings per share
$
1.45

 
$
1.18

Cash dividends per share
$
0.7875

 
$
0.75

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
286,467

 
285,858

Diluted shares outstanding
289,216

 
288,195

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,
 
2017
 
2016
SALES
$
8,484

 
$
7,890

Cost of sales, exclusive of depreciation and amortization
4,795

 
4,382

Selling, general and administrative
891

 
873

Depreciation and amortization
877

 
837

Research and development
69

 
69

Transaction costs and other charges

37

 
100

Other income (expense) - net
(3
)
 
10

OPERATING PROFIT
1,812

 
1,639

Interest expense - net
120

 
152

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
1,692

 
1,487

Income taxes
468

 
399

INCOME BEFORE EQUITY INVESTMENTS
1,224

 
1,088

Income from equity investments
35

 
31

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
1,259

 
1,119

Less: noncontrolling interests
(45
)
 
(25
)
NET INCOME - PRAXAIR, INC.
$
1,214

 
$
1,094

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
4.24

 
$
3.83

Diluted earnings per share
$
4.21

 
$
3.80

Cash dividends per share
$
2.36

 
$
2.25

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
286,022

 
285,663

Diluted shares outstanding
288,524

 
287,727

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,
 
2017
 
2016
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
435

 
$
344

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
204

 
(47
)
Income taxes
19

 
8

Translation adjustments
223

 
(39
)
Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(9
)
 
(11
)
Reclassifications to net income
19

 
18

Income taxes
(4
)
 
(2
)
Funded status - retirement obligations
6

 
5

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

 

Reclassifications to net income

 

Income taxes

 

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
229

 
(34
)
 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
664

 
310

Less: noncontrolling interests
(26
)
 
(8
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
638

 
$
302

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)
 
 
Nine Months Ended September 30,
 
2017
 
2016
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
1,259

 
$
1,119

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
 Foreign currency translation adjustments
520

 
392

 Income taxes
77

 
(3
)
Translation adjustments
597

 
389

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(29
)
 
(35
)
Reclassifications to net income
39

 
47

Income taxes
(4
)
 
(5
)
Funded status - retirement obligations
6

 
7

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

 

Reclassifications to net income

 
1

Income taxes

 
(1
)
Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
603

 
396

 
 
 
 
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)
1,862

 
1,515

Less: noncontrolling interests
(73
)
 
(36
)
COMPREHENSIVE INCOME - PRAXAIR, INC.
$
1,789

 
$
1,479

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, 2017
 
December 31, 2016
ASSETS
 
 
 
Cash and cash equivalents
$
607

 
$
524

Accounts receivable - net
1,809

 
1,641

Inventories
587

 
550

Prepaid and other current assets
240

 
165

TOTAL CURRENT ASSETS
3,243

 
2,880

Property, plant and equipment (less accumulated depreciation of $13,642 in 2017 and $12,444 in 2016)
11,992

 
11,477

Goodwill
3,234

 
3,117

Other intangible assets - net
563

 
583

Other long-term assets
1,343

 
1,275

TOTAL ASSETS
$
20,375

 
$
19,332

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
947

 
$
906

Short-term debt
84

 
434

Current portion of long-term debt
910

 
164

Other current liabilities
981

 
974

TOTAL CURRENT LIABILITIES
2,922

 
2,478

Long-term debt
8,243

 
8,917

Other long-term liabilities
2,468

 
2,485

TOTAL LIABILITIES
13,633

 
13,880

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests (Note 14)
11

 
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
4,091

 
4,074

Retained earnings
13,417

 
12,879

Accumulated other comprehensive income (loss) (Note 14)
(4,025
)
 
(4,600
)
Less: Treasury stock, at cost (2017 - 96,925,284 shares and 2016 - 98,329,849 shares)
(7,231
)
 
(7,336
)
Total Praxair, Inc. Shareholders’ Equity
6,256

 
5,021

Noncontrolling interests
475

 
420

TOTAL EQUITY
6,731

 
5,441

TOTAL LIABILITIES AND EQUITY
$
20,375

 
$
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)
 
 
Nine months ended September 30,
 
2017
 
2016
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
1,214

 
$
1,094

Noncontrolling interests
45

 
25

Net income (including noncontrolling interests)
1,259

 
1,119

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Transaction costs and other charges, net of payments
27

 
93

Depreciation and amortization
877

 
837

Deferred income taxes
22

 
(30
)
Share-based compensation
44

 
36

Working capital:
 
 
 
Accounts receivable
(83
)
 
(44
)
Inventory
(11
)
 
11

Prepaid and other current assets
(64
)
 
(32
)
Payables and accruals
11

 
6

Pension contributions
(14
)
 
(8
)
Long-term assets, liabilities and other
137

 
59

Net cash provided by operating activities
2,205

 
2,047

INVESTING
 
 
 
Capital expenditures
(972
)
 
(1,056
)
Acquisitions, net of cash acquired
(18
)
 
(345
)
Divestitures and asset sales
22

 
41

Net cash used for investing activities
(968
)
 
(1,360
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
(353
)
 
359

Long-term debt borrowings
11

 
925

Long-term debt repayments
(160
)
 
(728
)
Issuances of common stock
90

 
109

Purchases of common stock
(11
)
 
(133
)
Cash dividends - Praxair, Inc. shareholders
(675
)
 
(642
)
Noncontrolling interest transactions and other
(85
)
 
(122
)
Net cash provided by (used for) financing activities
(1,183
)
 
(232
)
Effect of exchange rate changes on cash and cash equivalents
29

 
25

Change in cash and cash equivalents
83

 
480

Cash and cash equivalents, beginning-of-period
524

 
147

Cash and cash equivalents, end-of-period
$
607

 
$
627

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 and includes several transition options.
The Company is currently in the process of evaluating and implementing this new guidance, as required, and will be prepared to adopt the new standard on January 1, 2018 using the modified retrospective transition option. Praxair will provide additional disclosures in its 2017 Annual Report on Form 10-K.
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 and requires companies to transition using a modified retrospective approach. Praxair is in the early stages of implementing 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 first quarter 2020. Praxair does not expect this guidance to have a material impact.

10


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.
Derivatives and Hedging - In August 2017, the FASB issued updated guidance on accounting for hedging activities. The new guidance changes both the designation and measurement for qualifying hedging relationships and the presentation of hedge results. This guidance will be effective for Praxair beginning in the first quarter 2019, with early adoption optional. 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.
2. Transaction Costs and Other Charges
2017 Transaction Costs and Other Charges
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 $14 million and $35 million for the quarter and nine months ended September 30, 2017 ($13 million and $34 million after-tax, or $0.05 and $0.12 per diluted share), respectively.

In addition, in the third quarter of 2017, a series of lump sum benefit payments for employees under an international pension plan triggered a settlement of the related pension obligation. Accordingly, Praxair recorded a pension settlement charge of $2 million ($1 million after-tax or less than $0.01 per diluted share).

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.
 
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 nine months ended September 30, 2017:
(millions of dollars)
Severance costs
 
Other Charges
 
Total
Balance, January 1, 2017
$
38

 
$
27

 
$
65

Less: Cash payments
(23
)
 
(4
)
 
(27
)
Foreign currency translation and other
8

 
(8
)
 

Balance, September 30, 2017
$
23

 
$
15

 
$
38



11


2016 Pension Settlement Charge
In 2015 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, in the third quarter 2016, Praxair recorded a pension settlement charge related to net unrecognized actuarial losses of $4 million ($3 million after-tax or $0.01 per diluted share).
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).
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
2017 Acquisitions
During the nine months ended September 30, 2017, Praxair had acquisitions totaling $18 million, primarily acquisitions of packaged gas businesses in North America. These transactions resulted in goodwill and other intangible assets of $13 million and $3 million, respectively (see Note 9).
2016 Acquisitions

During the nine months ended September 30, 2016, Praxair had acquisitions totaling $345 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 $129 million and $71 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.

12


4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
September 30,
2017
 
December 31,
2016
Inventories
 
 
 
Raw materials and supplies
$
214

 
$
197

Work in process
55

 
45

Finished goods
318

 
308

Total inventories
$
587

 
$
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 $51 million and $46 million at September 30, 2017 and December 31, 2016, respectively. These amounts are net of reserves of $53 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.


13


5. Debt
The following is a summary of Praxair’s outstanding debt at September 30, 2017 and December 31, 2016:
(Millions of dollars)
September 30,
2017
 
December 31,
2016
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
38

 
$
333

Other bank borrowings (primarily international)
46

 
101

Total short-term debt
84

 
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
706

 
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
648

 
575

2.65% Notes due 2025
397

 
397

1.625% Euro-denominated notes due 2025
585

 
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

 
9,153

 
9,081

Less: current portion of long-term debt
(910
)
 
(164
)
Total long-term debt
8,243

 
8,917

Total debt
$
9,237

 
$
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)
September 30, 2017 and December 31, 2016 include a $1 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 September 30, 2017.


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, 2017 and December 31, 2016 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,303

 
$
2,104

 
$
2

 
$
11

 
$
18

 
$
18

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

 
$
38

 
$

 
$
3

 
$
1

 
$

       Forecasted purchases (a)
4

 

 

 

 

 

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (b)
475

 
475

 
1

 
4

 

 

Total Hedges
$
517

 
$
513

 
$
1

 
$
7

 
$
1

 
$

Total Derivatives
$
2,820

 
$
2,617

 
$
3

 
$
18

 
$
19

 
$
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

15


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 ($706 million as of September 30, 2017) 1.50% Euro-denominated notes due 2020 and the €500 million ($585 million as of September 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 ($648 million as of September 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 $125 million (long-term debt increased by $214 million during the first nine 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 September 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 September 30, 2017, $1 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)
September 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
)
 
(4
)
 
(5
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
3

 
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.




16


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 September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
 
 
 
 
 
 
 
Debt-related
$
19

 
$
(10
)
 
$
128

 
$
73

Other balance sheet items
(1
)
 
(1
)
 
1

 
2

Total
$
18

 
$
(11
)
 
$
129

 
$
75


* 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 **
 
 
 
 
 
 
 
 
There was no impact for the quarters-ended September 30, 2017 and 2016.
 
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,
2017
 
September 30,
2016
 
September 30,
2017
 
September 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 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:

17


 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
 
September 30,
2017
 
December 31,
2016
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
3

 
$
18

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
19

 
$
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 September 30, 2017, the estimated fair value of Praxair’s long-term debt portfolio was $9,352 million versus a carrying value of $9,153 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.

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,
 
2017
 
2016
 
 
2017
 
2016
Numerator (Millions of dollars)
 
 
 
 
 
 
 
 
Net income - Praxair, Inc.
$
419

 
$
339

 
 
$
1,214

 
$
1,094

Denominator (Thousands of shares)
 
 
 
 
 
 
 
 
Weighted average shares outstanding
286,103

 
285,467

 
 
285,654

 
285,277

Shares earned and issuable under compensation plans
364

 
391

 
 
368

 
386

Weighted average shares used in basic earnings per share
286,467

 
285,858

 
 
286,022

 
285,663

Effect of dilutive securities
 
 
 
 
 
 
 
 
Stock options and awards
2,749

 
2,337

 
 
2,502

 
2,064

Weighted average shares used in diluted earnings per share
289,216

 
288,195

 
 
288,524

 
287,727

Basic Earnings Per Share
$
1.46

 
$
1.19

 
 
$
4.24

 
$
3.83

Diluted Earnings Per Share
$
1.45

 
$
1.18

 
 
$
4.21

 
$
3.80

There were no antidilutive shares for quarter ended September 30, 2017. Stock options of 2,439,499 for nine months ended September 30, 2017 and stock options of 2,624,190 and 2,625,825 for the quarter and nine months ended September 30, 2016 were antidilutive and therefore excluded in the computation of diluted earnings per share.

18


9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the nine months ended September 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
13

 

 

 

 

 
13

Purchase adjustments & other
1

 

 
1

 

 

 
2

Foreign currency translation
20

 
5

 
67

 
2

 
8

 
102

Balance, September 30, 2017
$
2,199

 
$
137

 
$
697

 
$
60

 
$
141

 
$
3,234


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 last 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 September 30, 2017.
Changes in the carrying amounts of other intangibles for the nine months ended September 30, 2017 were as follows:
(Millions of dollars)
Customer &
License/Use
Agreements
 
Non-compete
Agreements
 
Patents &
Other
 
Total
Cost:
 
 
 
 
 
 
 
Balance, December 31, 2016
$
751

 
$
34

 
$
51

 
$
836

Additions
1

 
2

 

 
3

Foreign currency translation
22

 
1

 
1

 
24

Other*
(3
)
 
(8
)
 

 
(11
)
Balance, September 30, 2017
$
771

 
$
29

 
$
52

 
$
852

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2016
$
(214
)
 
$
(22
)
 
$
(17
)
 
$
(253
)
Amortization expense
(30
)
 
(4
)
 
(3
)
 
(37
)
Foreign currency translation
(9
)
 

 

 
(9
)
Other*
2

 
8

 

 
10

Balance, September 30, 2017
$
(251
)
 
$
(18
)
 
$
(20
)
 
$
(289
)
Net balance at September 30, 2017
$
520

 
$
11

 
$
32

 
$
563


* 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
$
12

2018
45

2019
43

2020
41

2021
40

Thereafter
382

 
$
563


19


10. Share-Based Compensation
Share-based compensation of $16 million ($7 million after-tax) and $14 million ($5 million after-tax) was recognized during the quarters ended September 30, 2017 and 2016, respectively. The 2017 and 2016 quarters include $4 million and $5 million of excess tax benefits, respectively. Share-based compensation of $44 million ($12 million after-tax) and $36 million ($11 million after-tax) was recognized during the nine months ended September 30, 2017 and 2016, respectively. The 2017 and 2016 nine-month periods include $18 million and $15 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 nine months ended September 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.

The following weighted-average assumptions were used to value the grants in 2017 and 2016:
 
Nine months ended September 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 September 30, 2017 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, 2017
11,708

 
$
101.58

 
 
 
 
Granted
2,091

 
118.71

 
 
 
 
Exercised
(1,960
)
 
87.43

 
 
 
 
Cancelled or Expired
(115
)
 
113.50

 
 
 
 
Outstanding at September 30, 2017
11,724

 
106.89

 
6.1
 
$
385

Exercisable at September 30, 2017
7,678

 
$
103.37

 
4.6
 
$
279

The aggregate intrinsic value represents the difference between the company’s closing stock price of $139.74 as of September 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 nine-months ended September 30, 2017 was $17 million and $80 million, respectively ($22 million and $64 million during the same periods in 2016, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and nine-months ended September 30, 2017 was $18 million and $81 million, respectively ($41 million and $101 million for the same periods in 2016, respectively). The cash tax benefit realized from share-based compensation totaled $5 million and $31 million for the quarter and nine-months ended September 30, 2017, respectively ($7 million and $26 million for the same periods in 2016, respectively).
As of September 30, 2017, $23 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.
Performance-Based and Restricted Stock Awards
During the nine months ended September 30, 2017, the company granted performance-based stock awards to employees of 223,730 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

20


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 nine months ended September 30, 2017, the company also granted restricted stock units to employees of 81,917 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 nine months ended September 30, 2017 was $109.68 and $111.70, respectively ($93.46 and $98.12 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.
The weighted-average fair value of performance-based stock tied to relative TSR performance granted during the nine months ended September 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 September 30, 2017 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, 2017
714

 
$
115.72

 
274

 
$
109.49

Granted
224

 
114.82

 
82

 
111.70

Vested
(76
)
 
121.16

 
(83
)
 
118.34

Cancelled and Forfeited
(194
)
 
113.81

 
(7
)
 
109.27

Non-vested at September 30, 2017
668

 
$
113.40

 
266

 
$
107.45

There are approximately 9 thousand performance-based shares and 6 thousand restricted stock shares that are non-vested at September 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 September 30, 2017, based on current estimates of future performance, $23 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2020 and $13 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2020.

21


11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and nine months ended September 30, 2017 and 2016 are shown below:
 
 
Quarter Ended September 30,
 
Nine Months Ended September 30,
 
Pensions
 
OPEB
 
Pensions
 
OPEB
(Millions of dollars)
2017
 
2016
 
2017
 
2016
 
2017
 
2016
 
2017
 
2016
Service cost
$
12

 
$
11

 
$

 
$

 
$
35

 
$
35

 
$
2

 
$
2

Interest cost
25

 
27

 
2

 
2

 
76

 
76

 
4

 
4

Expected return on plan assets
(40
)
 
(39
)
 

 

 
(120
)
 
(117
)
 

 

Net amortization and deferral
17

 
14

 

 

 
51

 
45

 
(2
)
 
(2
)
Curtailment gain (1)

 

 

 

 

 

 
(18
)
 

Net periodic benefit cost before settlement charges
$
14

 
$
13

 
$
2

 
$
2

 
$
42

 
$
39

 
$
(14
)
 
$
4

Pension settlement charge (Note 2)
2

 
4

 

 

 
2

 
4

 

 

Net periodic benefit cost
$
16

 
$
17

 
$
2

 
$
2

 
$
44

 
$
43

 
$
(14
)
 
$
4

(1) The curtailment gain recorded during the nine months ended September 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 $15 million to $20 million, of which $14 million have been made through September 30, 2017.


22


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 September 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 $245 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$694 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$537 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.

23


13. Segments
Sales and operating profit by segment for the quarters and nine months ended September 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 September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
SALES(a) 
 
 
 
 
 
 
 
North America
$
1,518

 
$
1,431

 
$
4,481

 
$
4,195

Europe
407

 
366

 
1,146

 
1,041

South America
389

 
378

 
1,131

 
1,047

Asia
451

 
391

 
1,268

 
1,160

Surface Technologies
157

 
150

 
458

 
447

Total sales
$
2,922

 
$
2,716

 
$
8,484

 
$
7,890

  
Quarter Ended September 30,
 
Nine Months Ended September 30,
(Millions of dollars)
2017
 
2016
 
2017
 
2016
OPERATING PROFIT
 
 
 
 
 
 
 
North America
$
386

 
$
363

 
$
1,121

 
$
1,071

Europe
78

 
72

 
217

 
202

South America
63

 
68

 
190

 
193

Asia
88

 
68

 
243

 
198

Surface Technologies
27

 
26

 
78

 
75

Segment operating profit
642

 
597

 
1,849

 
1,739

Transaction costs and other charges (Note 2)
(16
)
 
(100
)
 
(37
)
 
(100
)
Total operating profit
$
626

 
$
497

 
$
1,812

 
$
1,639

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


24



14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters and nine months ended September 30, 2017 and 2016 is provided below:

Quarter Ended September 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
$
5,807

 
$
453

 
$
6,260

 
$
5,140

 
$
407

 
$
5,547

Net income (a)
419

 
16

 
435

 
339

 
3

 
342

Other comprehensive income (loss)
219

 
10

 
229

 
(37
)
 
3

 
(34
)
Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
2

 
2

 

 
(12
)
 
(12
)
Dividends and other capital changes

 
(6
)
 
(6
)
 

 
(8
)
 
(8
)
Redemption value adjustments

 

 

 
1

 

 
1

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
2

 

 
2

 
1

 

 
1

For employee savings and incentive plans
18

 

 
18

 
46

 

 
46

       Other

 

 

 
5

 

 
5

Purchases of common stock

 

 

 
(50
)
 

 
(50
)
Share-based compensation
16

 

 
16

 
14

 

 
14

Balance, end of period
$
6,256

 
$
475

 
$
6,731

 
$
5,245

 
$
393

 
$
5,638


25


 
Nine Months Ended September 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)
1,214

 
44

 
1,258

 
1,094

 
21

 
1,115

Other comprehensive income (loss)
575

 
28

 
603

 
385

 
7

 
392

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
9

 
9

 

 
(12
)
 
(12
)
Dividends and other capital changes

 
(26
)
 
(26
)
 

 
(27
)
 
(27
)
Redemption value adjustments

 

 

 
4

 

 
4

Dividends to Praxair, Inc. common stock holders ($2.36 per share in 2017 and $2.25 per share in 2016)
(675
)
 

 
(675
)
 
(642
)
 

 
(642
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
5

 

 
5

 
5

 

 
5

For employee savings and incentive plans
72

 

 
72

 
102

 

 
102

       Other

 

 

 
5

 

 
5

Purchases of common stock

 

 

 
(133
)
 

 
(133
)
Share-based compensation
44

 

 
44

 
36

 

 
36

Balance, end of period
$
6,256

 
$
475

 
$
6,731

 
$
5,245

 
$
393

 
$
5,638


(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of less than $1 million and $1 million for quarter and nine months ended September 30, 2017, respectively, and $2 million and $4 million for the quarter and nine months ended September 30, 2016, respectively, which is not part of total equity (see redeemable noncontrolling interests section below).
The components of AOCI are as follows:
 
September 30,
 
December 31,
(Millions of dollars)
2017
 
2016
Cumulative translation adjustment - net of taxes:
 
 
 
North America
$
(795
)
 
$
(1,038
)
South America
(1,914
)
 
(1,969
)
Europe
(401
)
 
(504
)
Asia
(245
)
 
(383
)
Surface Technologies
(22
)
 
(52
)
 
(3,377
)
 
(3,946
)
Derivatives - net of taxes
(1
)
 
(1
)
Pension / OPEB funded status obligation (net of $348 million and $352 million tax benefit in September 30, 2017 and December 31, 2016, respectively)
(647
)
 
(653
)
 
$
(4,025
)
 
$