10-Q 1 px-q1201810q.htm PRAXAIR, INC. 2018 FIRST 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 March 31, 2018
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 March 31, 2018, 287,369,483 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 

 
 
 
 
 
 
 
Condensed Consolidated Balance Sheets - Praxair, Inc. and Subsidiaries March 31, 2018 and December 31, 2017 (Unaudited)
 
 
 
 
Condensed Consolidated Statements of Cash Flows - Praxair, Inc. and Subsidiaries Three Months Ended March 31, 2018 and 2017 (Unaudited)
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 





PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED) 
 
Quarter Ended March 31,
 
2018
 
2017
SALES
$
2,999

 
$
2,728

Cost of sales, exclusive of depreciation and amortization
1,677

 
1,549

Selling, general and administrative
310

 
290

Depreciation and amortization
311

 
287

Research and development
24

 
23

Transaction costs and other charges
19

 
6

Other income (expense) - net
(5
)
 
(6
)
OPERATING PROFIT
653

 
567

Interest expense - net
46

 
41

Net pension and OPEB cost (benefit), excluding service cost
2

 
(15
)
INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
605

 
541

Income taxes
148

 
149

INCOME BEFORE EQUITY INVESTMENTS
457

 
392

Income from equity investments
15

 
12

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
472

 
404

Less: noncontrolling interests
(10
)
 
(15
)
NET INCOME - PRAXAIR, INC.
$
462

 
$
389

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.61

 
$
1.36

Diluted earnings per share
$
1.59

 
$
1.35

Cash dividends per share
$
0.825

 
$
0.7875

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
287,504

 
285,509

Diluted shares outstanding
290,809

 
287,384

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


3


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended March 31,
 
2018
 
2017
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
472

 
$
404

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
106

 
317

Income taxes
9

 
3

Translation adjustments
115

 
320

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
1

 
(3
)
Reclassifications to net income
17

 
4

Income taxes
(4
)
 
(1
)
Funded status - retirement obligations
14

 

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

 
(1
)
Reclassifications to net income

 

Income taxes

 
1

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
129

 
320

 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
601

 
724

Less: noncontrolling interests
(21
)
 
(20
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
580

 
$
704

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


4


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
March 31, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
545

 
$
617

Accounts receivable - net
1,900

 
1,804

Inventories
619

 
614

Prepaid and other current assets
265

 
250

TOTAL CURRENT ASSETS
3,329

 
3,285

Property, plant and equipment (less accumulated depreciation of $14,103 in 2018 and $13,819 in 2017)
12,113

 
12,057

Goodwill
3,274

 
3,233

Other intangible assets - net
547

 
553

Other long-term assets
1,329

 
1,308

TOTAL ASSETS
$
20,592

 
$
20,436

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
988

 
$
972

Short-term debt
527

 
238

Current portion of long-term debt
979

 
979

Other current liabilities
1,040

 
1,118

TOTAL CURRENT LIABILITIES
3,534

 
3,307

Long-term debt
7,336

 
7,783

Other long-term liabilities
2,825

 
2,824

TOTAL LIABILITIES
13,695

 
13,914

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests (Note 14)
13

 
11

Praxair, Inc. Shareholders’ Equity:
 
 
 
Common stock $0.01 par value, authorized - 800,000,000 shares, issued 2018 and 2017 - 383,230,625 shares
4

 
4

Additional paid-in capital
4,049

 
4,084

Retained earnings
13,447

 
13,224

Accumulated other comprehensive income (loss) (Note 14)
(3,980
)
 
(4,098
)
Less: Treasury stock, at cost (2018 - 95,861,142 shares and 2017 - 96,453,634 shares)
(7,152
)
 
(7,196
)
Total Praxair, Inc. Shareholders’ Equity
6,368

 
6,018

Noncontrolling interests
516

 
493

TOTAL EQUITY
6,884

 
6,511

TOTAL LIABILITIES AND EQUITY
$
20,592

 
$
20,436

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


5


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
 
 
Three months ended March 31,
 
2018
 
2017
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
462

 
$
389

Noncontrolling interests
10

 
15

Net income (including noncontrolling interests)
472

 
404

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Transaction costs and other charges, net of payments
14

 
6

Depreciation and amortization
311

 
287

Deferred income taxes
11

 
22

Share-based compensation
4

 
12

Working capital:
 
 
 
Accounts receivable
(82
)
 
(49
)
Inventory
(2
)
 
(2
)
Prepaid and other current assets
(19
)
 
(13
)
Payables and accruals
(67
)
 
(42
)
Pension contributions
(4
)
 
(3
)
Long-term assets, liabilities and other
50

 
88

Net cash provided by operating activities
688

 
710

INVESTING
 
 
 
Capital expenditures
(325
)
 
(327
)
Acquisitions, net of cash acquired

 
(1
)
Divestitures and asset sales
7

 
4

Net cash used for investing activities
(318
)
 
(324
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
288

 
(24
)
Long-term debt borrowings

 
7

Long-term debt repayments
(503
)
 
(156
)
Issuances of common stock
29

 
26

Purchases of common stock

 
(11
)
Cash dividends - Praxair, Inc. shareholders
(237
)
 
(225
)
Noncontrolling interest transactions and other
(6
)
 
(13
)
Net cash provided by (used for) financing activities
(429
)
 
(396
)
Effect of exchange rate changes on cash and cash equivalents
(13
)
 
5

Change in cash and cash equivalents
(72
)
 
(5
)
Cash and cash equivalents, beginning-of-period
617

 
524

Cash and cash equivalents, end-of-period
$
545

 
$
519

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

6


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


7


PRAXAIR, INC. AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. Summary of Significant Accounting Policies
Presentation of Condensed Consolidated Financial Statements - In the opinion of Praxair, Inc. (Praxair) management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented and such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements of Praxair, Inc. and subsidiaries in Praxair’s 2017 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2018.
Accounting Standards Implemented in 2018
Revenue Recognition – In May 2014, the FASB issued updated guidance on the reporting and disclosure of revenue. Effective January 1, 2018, Praxair has adopted this guidance using the modified retrospective transition method. No material differences in revenue recognition accounting were identified under the new guidance compared with the Company's historic revenue recognition accounting (see Note 15).
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. The adoption of this guidance did not have a material impact on the financial statements.
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. The adoption of this guidance did not have a material impact on the financial statements.
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 was adopted in the first quarter 2018. Accordingly, non-service related components of net periodic pension and postretirement benefit costs were reclassified out of "Operating Profit" to "Net pension and OPEB cost (benefit), excluding service cost" using the practical expedient to use the amounts disclosed in the retirement benefits note for the prior comparative periods as the estimation basis for applying the retrospective presentation requirements (see Note 11).

Accounting Standards to be Implemented

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 process 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.
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.

8


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.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income – In February 2018, the FASB issued updated guidance which allows a reclassification from accumulated other comprehensive income to retained earnings for stranded tax effects resulting from the Tax Cuts and Jobs Act. This new guidance will be effective for Praxair beginning in the first quarter 2019 on a retrospective basis, with early adoption optional. Praxair is currently assessing the impact and timing of adoption.
Reclassifications – Certain prior years’ amounts have been reclassified to conform to the current year’s presentation including reclassifications on the consolidated statements of income and segment operating profit relating to the adoption of accounting guidance on the presentation of net periodic pension and postretirement benefit costs.
2. 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 17). In the first quarters of 2018 and 2017, Praxair incurred transaction costs and other charges primarily in connection with the intended business combination totaling $19 million ($18 million after-tax and noncontrolling interests or $0.06 per diluted share) and $6 million after-tax ($0.02 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.
 
3. Acquisitions
Acquisition activity was immaterial in both the first quarter of 2018 and 2017.

4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
March 31,
2018
 
December 31,
2017
Inventories
 
 
 
Raw materials and supplies
$
223

 
$
224

Work in process
54

 
57

Finished goods
342

 
333

Total inventories
$
619

 
$
614


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 $44 million and $54 million at March 31, 2018 and December 31, 2017, respectively. These amounts are net of reserves of $54 million and $51 million, respectively. The amounts in both periods relate primarily to government receivables in Brazil and other long-term notes receivable from customers. Collectability is reviewed regularly and uncollectible amounts are written off as appropriate.

9



5. Debt
The following is a summary of Praxair’s outstanding debt at March 31, 2018 and December 31, 2017:
(Millions of dollars)
March 31,
2018
 
December 31,
2017
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
492

 
$
202

Other bank borrowings (primarily international)
35

 
36

Total short-term debt
527

 
238

LONG-TERM (a)
 
 
 
U.S. borrowings (U.S. dollar denominated unless otherwise noted)
 
 
 
1.20% Notes due 2018 (b)

 
498

1.25% Notes due 2018 (c)
474

 
475

4.50% Notes due 2019
599

 
599

1.90% Notes due 2019
500

 
500

1.50% Euro-denominated notes due 2020
737

 
717

2.25% Notes due 2020
299

 
299

4.05% Notes due 2021
498

 
498

3.00% Notes due 2021
497

 
497

2.45% Notes due 2022
598

 
598

2.20% Notes due 2022
498

 
498

2.70% Notes due 2023
498

 
498

1.20% Euro-denominated notes due 2024
675

 
658

2.65% Notes due 2025
397

 
397

1.625% Euro-denominated notes due 2025
610

 
594

3.20% Notes due 2026
725

 
725

3.55% Notes due 2042
662

 
662

Other
9

 
12

International bank borrowings
35

 
33

Obligations under capital leases
4

 
4

 
8,315

 
8,762

Less: current portion of long-term debt
(979
)
 
(979
)
Total long-term debt
7,336

 
7,783

Total debt
$
8,842

 
$
9,000

 
(a)
Amounts are net of unamortized discounts, premiums and/or debt issuance costs as applicable.
(b)
In March 2018, Praxair repaid $500 million of 1.20% notes that became due.
(c)
March 31, 2018 and December 31, 2017 include a $1 million fair value decrease and a less than $1 million increase, respectively, related to hedge accounting. See Note 6 for additional information.


10


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 March 31, 2018 and December 31, 2017 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,288

 
$
2,693

 
$
12

 
$
16

 
$
5

 
$
16

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

 
$
38

 
$

 
$

 
$

 
$
2

       Forecasted purchases (a)
5

 
4

 

 
1

 

 

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
475

 
475

 

 

 
1

 

Total Hedges
$
480

 
$
517

 
$

 
$
1

 
$
1

 
$
2

Total Derivatives
$
2,768

 
$
3,210

 
$
12

 
$
17

 
$
6

 
$
18

 
(a)
Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities.

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

11


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 ($737 million as of March 31, 2018) 1.50% Euro-denominated notes due 2020 and the €500 million ($610 million as of March 31, 2018) 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 ($675 million as of March 31, 2018) 1.20% Euro-denominated notes due 2024 as an additional hedge of the net investment position in its European operations. On December 22, 2017, the U.S. government enacted the Tax Cuts and Jobs Act. In response to the decrease in the tax rate from 35% to 21%, as of March 31, 2018 the Company has de-designated €130 million of its Euro-denominated notes, which were previously designated as a hedge of the net investment position in its European operations. These Euro-denominated debt instruments reduce the company's exposure to changes in the currency exchange rate on investments in foreign subsidiaries with Euro functional currencies. Since hedge inception, exchange rate movements have reduced long-term debt by $51 million (long-term debt increased by $46 million during the first quarter of 2018), 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 March 31, 2018, 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 March 31, 2018, $1 million was recognized as a decrease in the fair value of these notes (increase in the fair value of less than $1 million at December 31, 2017).

Terminated Treasury Rate Locks
The following table summarizes the unrecognized gains (losses) related to terminated treasury rate lock contracts:
 
Year
Terminated
 
Original
Gain /
(Loss)
 
Unrecognized Gain / (Loss) (a)
(Millions of dollars)
March 31,
2018
 
December 31,
2017
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
)
 
(4
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
3

 
3

       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.


12


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 March 31,
 
(Millions of dollars)
2018
 
2017
 
Derivatives Not Designated as Hedging Instruments
 
 
 
 
Currency contracts:
 
 
 
 
Balance sheet items
 
 
 
 
Debt-related
$
36

 
$
79

 
Other balance sheet items
2

 
1

 
Total
$
38

 
$
80

 

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

The following table summarizes the 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)
March 31,
2018
 
March 31,
2017
 
March 31,
2018
 
March 31,
2017
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$

 
$
(1
)
 
$

 
$

Net investment hedge

 

 

 

Forecasted purchases

 

 

 

Interest rate contracts:
 
 
 
 
 
 
 
Treasury rate lock contracts

 

 

 

Total - pre tax
$

 
$
(1
)
 
$

 
$

Less: income taxes

 
1

 

 

Total - Net of Taxes
$

 
$

 
$

 
$

**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 2018 or 2017. The gains (losses) on net investment hedges are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale or liquidation of the investment. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt. Net losses of less than $1 million are expected to be reclassified to earnings during the next twelve months.

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

13


 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
 
March 31,
2018
 
December 31,
2017
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
12

 
$
17

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
6

 
$
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 March 31, 2018, the estimated fair value of Praxair’s long-term debt portfolio was $8,380 million versus a carrying value of $8,315 million. At December 31, 2017, the estimated fair value of Praxair’s long-term debt portfolio was $8,969 million versus a carrying value of $8,762 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 March 31,
 
2018
 
2017
Numerator (Millions of dollars)
 
 
 
Net income - Praxair, Inc.
$
462

 
$
389

Denominator (Thousands of shares)
 
 
 
Weighted average shares outstanding
287,175

 
285,140

Shares earned and issuable under compensation plans
329

 
369

Weighted average shares used in basic earnings per share
287,504

 
285,509

Effect of dilutive securities
 
 
 
Stock options and awards
3,305

 
1,875

Weighted average shares used in diluted earnings per share
290,809

 
287,384

Basic Earnings Per Share
$
1.61

 
$
1.36

Diluted Earnings Per Share
$
1.59

 
$
1.35

There were no antidilutive shares for the quarter ended March 31, 2018. Stock options of 4,673,805 were antidilutive and therefore excluded in the computation of diluted earnings per share for the quarter ended March 31, 2017.

14


9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the three months ended March 31, 2018 were as follows:
(Millions of dollars)
North
America
 
South
America
 
Europe
 
Asia
 
Surface
Technologies
 
Total
Balance, December 31, 2017
$
2,202

 
$
129

 
$
698

 
$
61

 
$
143

 
$
3,233

Acquisitions

 

 

 

 

 

Purchase adjustments & other
12

 

 

 

 

 
12

Foreign currency translation
3

 
(1
)
 
23

 
2

 
2

 
29

Balance, March 31, 2018
$
2,217

 
$
128

 
$
721

 
$
63

 
$
145

 
$
3,274


Praxair has performed its goodwill impairment tests annually during the second quarter of each year, and historically has determined that the fair value of each of its reporting units was substantially in excess of its carrying value (refer to Note 1 to the consolidated financial statements of Praxair's 2017 Annual Report on Form 10-K). As a result, no impairment was recorded. There were no indicators of impairment through March 31, 2018.
Changes in the carrying amounts of other intangibles for the three months ended March 31, 2018 were as follows:
(Millions of dollars)
Customer &
License/Use
Agreements
 
Non-compete
Agreements
 
Patents &
Other
 
Total
Cost:
 
 
 
 
 
 
 
Balance, December 31, 2017
$
772

 
$
28

 
$
52

 
$
852

Additions

 

 

 

Foreign currency translation
8

 

 

 
8

Other*
(19
)
 
(5
)
 

 
(24
)
Balance, March 31, 2018
$
761

 
$
23

 
$
52

 
$
836

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2017
$
(260
)
 
$
(18
)
 
$
(21
)
 
$
(299
)
Amortization expense
(9
)
 
(1
)
 
(1
)
 
(11
)
Foreign currency translation
(3
)
 

 

 
(3
)
Other*
19

 
5

 

 
24

Balance, March 31, 2018
$
(253
)
 
$
(14
)
 
$
(22
)
 
$
(289
)
Net balance at March 31, 2018
$
508

 
$
9

 
$
30

 
$
547


* Other primarily relates to the write-off of fully amortized assets.
There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible assets is approximately 16 years.
Total estimated annual amortization expense is as follows:
(Millions of dollars)
 
Remaining 2018
$
33

2019
44

2020
42

2021
40

2022
39

Thereafter
349

 
$
547


15


10. Share-Based Compensation
Share-based compensation expense of $4 million (benefit of $10 million after-tax) and $12 million ($4 million after-tax) was recognized during the quarters ended March 31, 2018 and 2017, respectively. The 2018 and 2017 quarters include $13 million and $4 million of excess tax benefits, respectively. The expense was recorded primarily in selling, general and administrative expenses. There was no share-based compensation cost that was capitalized. For further details regarding Praxair’s share-based compensation arrangements and prior-year grants, refer to Note 15 to the consolidated financial statements of Praxair’s 2017 Annual Report on Form 10-K.
Stock Options
The weighted-average fair value of options granted during the three months ended March 31, 2018 was $19.29 ($12.40 in 2017) 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 2018 and 2017:
 
Three months ended March 31,
 
2018
 
2017
Dividend yield
2.1
%
 
2.7
%
Volatility
14.4
%
 
14.0
%
Risk-free interest rate
2.67
%
 
2.13
%
Expected term years
5

 
6

The following table summarizes option activity under the plans as of March 31, 2018 and changes during the three-month period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):
 
Number of
Options  (000’s)
 
Average
Exercise Price
 
Average
Remaining
Life
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2018
10,787

 
$
108.70

 
 
 
 
Granted
1,625

 
154.00

 
 
 
 
Exercised
(901
)
 
90.70

 
 
 
 
Cancelled or Expired
(16
)
 
115.09

 
 
 
 
Outstanding at March 31, 2018
11,495

 
116.50

 
6.7
 
$
335

Exercisable at March 31, 2018
7,755

 
$
109.67

 
5.5
 
$
269

The aggregate intrinsic value represents the difference between the company’s closing stock price of $144.30 as of March 31, 2018 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 ended March 31, 2018 was $63 million ($18 million during the same period in 2017).
Cash received from option exercises under all share-based payment arrangements for the quarter ended March 31, 2018 was $78 million ($19 million for the same period in 2017). The cash tax benefit realized from share-based compensation totaled $14 million for the quarter ended March 31, 2018 ($8 million for the same period in 2017).
As of March 31, 2018, $40 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.
Performance-Based and Restricted Stock Awards
During the three months ended March 31, 2018, the company granted restricted stock units to employees of 269,433 shares. There were no performance-based stock awards granted to employees during the three months ended March 31, 2018 as restricted stock units were granted in place of performance-based stock awards. Compensation expense related to the restricted stock units is recognized over the vesting period, which is up to three years, based on the grant date fair value.
As of March 31, 2018 the company had performance-based stock awards outstanding, 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

16


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.
The weighted-average fair value of restricted stock units granted during the three months ended March 31, 2018 was $144.79 ($109.64 for the same period in 2017). 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 ROC performance-based stock awards granted during the three months ended March 31, 2017 was 109.68.
The weighted-average fair value of performance-based stock tied to relative TSR performance granted during three months ended March 31, 2017 was $124.12 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 March 31, 2018 and changes during the three months then ended (shares based on target amounts, averages are calculated on a weighted basis):
 
Performance-Based
 
Restricted Stock
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
Non-vested at January 1, 2018
665

 
$
113.40

 
264

 
$
107.56

Granted

 

 
269

 
144.79

Vested
(78
)
 
120.04

 
(65
)
 
119.87

Cancelled and Forfeited
(147
)
 
111.63

 
(1
)
 
116.19

Non-vested at March 31, 2018
440

 
$
110.02

 
467

 
$
127.32

There are approximately 6 thousand performance-based shares and 3 thousand restricted stock shares that are non-vested at March 31, 2018 which will be settled in cash due to foreign regulatory limitations. The liability related to these grants reflects the current estimate of performance that will be achieved and the current common stock price.
As of March 31, 2018, based on current estimates of future performance, $13 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2020 and $43 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2021.

17


11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters ended March 31, 2018 and 2017 are shown below:
 
 
Quarter Ended March 31,
 
Pensions
 
OPEB
(Millions of dollars)
2018
 
2017
 
2018
 
2017
Amount recognized in Operating Profit
 
 
 
 
 
 
 
Service cost
$
12

 
$
11

 
$

 
$
1

Amount recognized in Net pension and OPEB cost (benefit), excluding service cost
 
 
 
 
 
 
 
Interest cost
26

 
26

 
1

 
1

Expected return on plan assets
(42
)
 
(40
)
 

 

Net amortization and deferral
18

 
17

 
(1
)
 
(1
)
Curtailment gain (a)

 

 

 
(18
)
 
$
2

 
$
3

 
$

 
$
(18
)
 Net periodic benefit cost (benefit)
$
14

 
$
14

 
$

 
$
(17
)

(a) The curtailment gain recorded in the first quarter of 2017 resulted from the termination of an OPEB plan in South America.
Praxair estimates that 2018 required contributions to its pension plans will be in the range of $15 million to $20 million, of which $4 million have been made through March 31, 2018.


18


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 2017 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 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 March 31, 2018 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 $240 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$662 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$511 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.

19


13. Segments
For a description of Praxair’s operating segments, refer to Note 18 to the consolidated financial statements of Praxair’s 2017 Annual Report on Form 10-K.
Sales and operating profit by segment for the quarters ended March 31, 2018 and 2017 are shown below. 2017 segment operating profit has been reclassified to conform with current year presentation as a result of the adoption of new accounting guidance on the presentation of net periodic pension and postretirement benefit costs (see Note 1).

  
Quarter Ended March 31,
(Millions of dollars)
2018
 
2017
SALES(a) 
 
 
 
North America
$
1,563

 
$
1,458

Europe
428

 
356

South America
365

 
369

Asia
476

 
395

Surface Technologies
167

 
150

Total sales
$
2,999

 
$
2,728

  
Quarter Ended March 31,
(Millions of dollars)
2018
 
2017
OPERATING PROFIT
 
 
 
North America
$
406

 
$
357

Europe
80

 
67

South America
54

 
48

Asia
104

 
75

Surface Technologies
28

 
26

Segment operating profit
672

 
573

Transaction costs and other charges (Note 2)
(19
)
 
(6
)
Total operating profit
$
653

 
$
567

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


20



14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters ended March 31, 2018 and 2017 is provided below:

Quarter Ended March 31,
(Millions of dollars)
2018
 
2017
Activity
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
 
Praxair, Inc.
Shareholders’
Equity
 
Noncontrolling
Interests
 
Total
Equity
Balance, beginning of period
$
6,018

 
$
493

 
$
6,511

 
$
5,021

 
$
420

 
$
5,441

Net income (a)
462

 
9

 
471

 
389

 
15

 
404

Other comprehensive income (loss)
118

 
11

 
129

 
315

 
5

 
320

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
6

 
6

 

 

 

Dividends and other capital changes

 
(3
)
 
(3
)
 

 
(4
)
 
(4
)
Redemption value adjustments
(2
)
 

 
(2
)
 

 

 

Dividends to Praxair, Inc. common stock holders ($0.825 per share in 2018 and $0.7875 per share in 2017)
(237
)
 

 
(237
)
 
(225
)
 

 
(225
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
2

 

 
2

 
2

 

 
2

For employee savings and incentive plans
3

 

 
3

 
15

 

 
15

Purchases of common stock

 

 

 

 

 

Share-based compensation
4

 

 
4

 
12

 

 
12

Balance, end of period
$
6,368

 
$
516

 
$
6,884

 
$
5,529

 
$
436

 
$
5,965


(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $1 million for three months ended March 31,2018 (net income was insignificant for the same time period in 2017) which is not part of total equity (see redeemable noncontrolling interests section below).
The components of AOCI are as follows:
 
March 31,
 
December 31,
(Millions of dollars)
2018
 
2017
Cumulative translation adjustment - net of taxes:
 
 
 
North America
$
(853
)
 
$
(885
)
South America
(2,011
)
 
(2,004
)
Europe
(384
)
 
(398
)
Asia
(95
)
 
(151
)
Surface Technologies
(8
)
 
(17
)
 
(3,351
)
 
(3,455
)
Derivatives - net of taxes
(1
)
 
(1
)
Pension / OPEB funded status obligation (net of $343 million and $347 million tax benefit in March 31, 2018 and December 31, 2017, respectively)
(628
)
 
(642
)
 
$
(3,980
)
 
$
(4,098
)


21


Redeemable Noncontrolling Interests
Noncontrolling interests with redemption features, such as put/sell options, that are not solely within the Company’s control (“redeemable noncontrolling interests”) are reported separately in the consolidated balance sheets at the greater of carrying value or redemption value. For redeemable noncontrolling interests that are not yet exercisable, Praxair calculates the redemption value by accreting the carrying value to the redemption value over the period until exercisable. If the redemption value is greater than the carrying value, any increase is adjusted directly to equity and does not impact net income.
At March 31, 2018 and 2017, redeemable noncontrolling interests includes one packaged gas distributor in the United States where the noncontrolling shareholder has a put option.
Following is a summary of the changes in redeemable noncontrolling interests for the three months ended March 31, 2018 and 2017: 
(Millions of dollars)
2018
 
2017
Balance, January 1
$
11

 
$
11

Net income
1

 

Distributions to noncontrolling interest and other
(1
)
 
(1
)
Redemption value adjustments/accretion
2

 

Balance, March 31
$
13

 
$
10


15. Revenue Recognition

Effective January 1, 2018, Praxair adopted the FASB's Accounting Standards Update No. 2014-09 ("ASC 606") relating to Revenue Recognition using the modified retrospective transition method. The new accounting standard requires revenue to be recognized as control of goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled to receive in exchange for the goods or services. No material differences in revenue recognition were identified as compared to the Company's historical revenue recognition accounting; accordingly, there is no adjustment to opening retained earnings at January 1, 2018 and therefore no need to present comparable revenue in accordance with the prior accounting policy. The following sections include updated accounting policies and disclosures required by ASC 606. Praxair's significant accounting policies for periods through December 31, 2017 are summarized in Note 1 to its 2017 Annual Report on Form 10-K.
Contracts with Customers
Approximately 94% of Praxair’s consolidated sales are generated from industrial gases and related products in four geographic segments (North America, Europe, South America and Asia) and the remaining 6% is related to the global surface technologies segment. Praxair serves a diverse group of industries including healthcare, petroleum refining, manufacturing, food, beverage carbonation, fiber-optics, steel making, aerospace, chemicals and water treatment.
Industrial Gases
Within each of the Company’s geographic segments for industrial gases, there are three basic distribution methods: (i) on-site or tonnage; (ii) merchant or bulk liquid; and (iii) packaged or cylinder gases. The distribution method used by Praxair to supply a customer is determined by many factors, including the customer’s volume requirements and location. The distribution method generally determines the contract terms with the customer and, accordingly, the revenue recognition accounting practices. Praxair’s primary products in its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). These products are generally sold through one of the three distribution methods.
Following is a description of each of the three industrial gases distribution methods and the respective revenue recognition policies:
On-site. Customers that require the largest volumes of product and that have a relatively constant demand pattern are supplied by cryogenic and process gas on-site plants. Praxair constructs plants on or adjacent to these customers’ sites and supplies the product directly to customers by pipeline. Where there are large concentrations of customers, a single pipeline may be connected to several plants and customers. On-site product supply contracts generally are total requirement contracts with terms typically ranging from 10-20 years and contain minimum purchase requirements and price escalation provisions. Many of the cryogenic on-site plants also produce liquid products for the merchant market. Therefore, plants are typically not dedicated to a single customer. Additionally, Praxair is responsible for the design, construction, operations and maintenance of the plants and our customers typically have no involvement in these activities. Advanced air separation processes also allow on-site delivery to customers with smaller volume requirements.

22


The Company’s performance obligations related to on-site customers are satisfied over time as customers receive and obtain control of the product. Praxair has elected to apply the practical expedient for measuring progress towards the completion of a performance obligation and recognizes revenue as the company has the right to invoice each customer, which generally corresponds with product delivery. Accordingly, revenue is recognized when product is delivered to the customer and the Company has the right to invoice the customer in accordance with the contract terms. Consideration in these contracts is generally based on pricing which fluctuates with various price indices. Variable components of consideration exist within on-site contracts but are considered constrained.
Merchant. Merchant deliveries generally are made from Praxair’s plants by tanker trucks to storage containers at the customer's site. Due to the relatively high distribution cost, merchant oxygen and nitrogen generally have a relatively small distribution radius from the plants at which they are produced. Merchant argon, hydrogen and helium can be shipped much longer distances. The customer agreements used in the merchant business are usually three-to seven-year supply agreements based on the requirements of the customer. These contracts generally do not contain minimum purchase requirements or volume commitments.
The Company’s performance obligations related to merchant customers are generally satisfied at a point in time as the customers receive and obtain control of the product. Revenue is recognized when product is delivered to the customer and the Company has the right to invoice the customer in accordance with the contract terms. Any variable components of consideration within merchant contracts are constrained however this consideration is not significant.
Packaged Gases. Customers requiring small volumes are supplied products in containers called cylinders, under medium to high pressure. Praxair distributes merchant gases from its production plants to Company-owned cylinder filling plants where cylinders are then filled for distribution to customers. Cylinders may be delivered to the customer’s site or picked up by the customer at a packaging facility or retail store. Praxair invoices the customer for the industrial gases and the use of the cylinder container(s). The Company also sells hardgoods and welding equipment purchased from independent manufacturers. Packaged gases are generally sold under one to three-year supply contracts and purchase orders and do not contain minimum purchase requirements or volume commitments.
The Company’s performance obligations related to packaged gases are satisfied at a point in time. Accordingly, revenue is recognized when product is delivered to the customer or when the customer picks up product from a packaged gas facility or retail store, and the Company has the right to payment from the customer in accordance with the contract terms. Any variable consideration is constrained and will be recognized when the uncertainty related to the consideration is resolved.
Surface Technologies
The company’s surface technologies segment, operated through Praxair Surface Technologies, Inc., supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders. Praxair Surface Technologies is a leading global supplier of coatings services and thermal spray consumables to customers in the aircraft, energy, printing, primary metals, petrochemical, textile, and other industries. Its coatings are used to provide wear resistance, corrosion protection, thermal insulation, and many other surface-enhancing functions which serve to extend component life, enable optimal performance, and reduce operating costs. It also manufactures a complete line of electric arc, plasma and wire spray, and high-velocity oxy-fuel ("HVOF") equipment.
The Company’s performance obligation related to surface technologies customers are generally satisfied at a point in time when the customer receives and takes control of product. Accordingly, revenue is recognized when product is delivered to the customer or when the customer picks up the product from the Company’s facility, and the Company has the right to invoice the customer in accordance with the contract terms.
Payment Terms and Other
Praxair generally receives payment after performance obligations are satisfied, and customer prepayments are not typical. Payment terms vary based on the country where sales originate and local customary payment practices. Praxair does not offer extended financing outside of customary payment terms. Contract asset and liability balances and the changes in these balances are not material. Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue producing transactions are presented on a net basis and are not included in sales within the consolidated statement of income. Additionally, sales returns and allowances are not a normal practice in the industry and are not significant.
Disaggregated Revenues Information
As described above and in Note 18 of the 2017 10-K, the Company manages its industrial gases business on a geographic basis, while the surface technologies business is managed on a global basis. Further, the Company believes that reporting sales by distribution method by reportable geographic segment best illustrates the nature, timing, type of customer, and contract terms for its revenues, including terms and pricing.

23


The following table shows sales by distribution method for each reportable segment and at the consolidated level for the quarter ended March 31, 2018.
(Dollars in Millions)
Industrial Gases
 
 
Sales
North America
Europe
South America
Asia
Surface Technologies
Total
%
 
 
 
 
 
 
 
 
Merchant
$
573
 
$
148

$
143

$
147

$

$
1,011

34
%
On-Site
460
 
80

114

246


900

30
%
Packaged Gas
493
 
181

98

54


826

27
%
Other
37
 
19

10

29

167

262

9
%
 
$
1,563
 
$
428

$
365

$
476

$
167

$
2,999

100
%

Remaining Performance Obligations
As described above, Praxair’s contracts with on-site customers are under long-term supply arrangements which generally require the customer to purchase their requirements from Praxair and also have minimum purchase requirements. The Company estimates the consideration related to minimum purchase requirements is approximately $17 billion. This amount excludes all sales above minimum purchase requirements, which can be significant depending on customer needs. In the future, actual amounts will be different due to impacts from several factors, many of which are beyond the Company’s control including, but not limited to, timing of newly signed, terminated and renewed contracts, inflationary price escalations, currency exchange rates, and pass-through costs related to natural gas and electricity. The actual duration of long-term supply contracts ranges up to twenty years. The Company estimates that approximately half of the revenue related to minimum purchase requirements are estimated to be earned in the next five years and the remaining thereafter.

Note 16. Income Taxes

U.S. Tax Cuts and Jobs Act (Tax Act)
On December 22, 2017 the U.S. government enacted the Tax Cuts and Jobs Act (Tax Act). This comprehensive tax legislation significantly revises the U.S. corporate income tax rules by, among other things, lowering the corporate income tax rate from 35% to 21%, implementing a territorial tax system and imposing a one-time tax on accumulated earnings of foreign subsidiaries. Given the substantial uncertainties surrounding the Tax Act and the short period of time between December 22, 2017 and December 31, 2017 to calculate the U.S. Federal, U.S. state, and non-U.S. tax impacts of the Tax Act, the Company is accounting for its income tax charge on a provisional (estimated) basis as allowed by SEC Staff Accounting Bulletin No. 118. In 2017, the Company recorded a net provisional income tax charge of $394 million with three main components: (i) an estimated $467 million U.S. federal and state tax charge for deemed repatriation of accumulated foreign earnings; (ii) an estimated $260 million charge for foreign withholding taxes related to anticipated future repatriation of foreign earnings; and (iii) an estimated $333 million deferred tax benefit for the revaluation of net deferred tax liabilities from 35% to the new 21% tax rate. Refer to Note 5 to the consolidated financial statements of Praxair's 2017 Annual Report on Form 10-K.
During 2018, the Company will continue to evaluate the Tax Act, additional guidance from the Internal Revenue Service, its historical foreign earnings and taxes and other items that could impact its net provisional tax charge. Additionally, the Company will continue to review its foreign capital structures, organizational cash needs and the foreign withholding tax cost of planned repatriation. As new information becomes available, the Company will update its provisional estimate and record any changes to its income tax expense at that time. As of March 31, 2018, there have been no adjustments to the net provisional income tax charge recognized in 2017.

24


17. Proposed Business Combination with Linde AG

On June 1, 2017, Praxair, Inc. and Linde AG entered into a definitive Business Combination Agreement, as amended (the "Business Combination Agreement"), pursuant to which, among other things, Praxair, Inc. and Linde AG agreed to combine their respective businesses through an all-stock transaction, and become subsidiaries of a new holding company incorporated in Ireland, Linde plc. In connection with the proposed business combination, Linde plc filed a Registration Statement on Form S-4 which was declared effective by the U. S. Securities and Exchange Commission ("SEC") on August 14, 2017.

Linde plc has also filed an offer document with the German Federal Financial Supervisory Authority (Bundesanstalt fuer Finanzdienstleistungsaufsicht) (“BaFin”) which was approved for publication by BaFin on August 14, 2017 and published by Linde plc on August 15, 2017. Pursuant to the offer document, Linde plc made an offer to exchange each issued and outstanding no-par value bearer share of Linde AG for 1.540 ordinary shares of Linde plc (the “Exchange Offer”). In addition, Zamalight Subco, Inc., an indirect wholly-owned Delaware subsidiary of Linde plc, will merge with and into Praxair, Inc., with Praxair, Inc. surviving the merger (the “Merger”, and together with the Exchange Offer, the “Business Combination”). In the Merger, each share of Praxair, Inc. common stock will be converted into the right to receive one Linde plc ordinary share. Praxair Inc.’s stockholders approved the Merger at Praxair Inc.’s special meeting held on September 27, 2017, and on November 24, 2017, the tender period for the Exchange Offer expired with approximately 92% of all Linde AG shares entitled to voting rights being tendered. The parties currently expect the Business Combination to be completed in the second half of 2018. Upon completion of the business combination, Linde plc will apply to list its ordinary shares on the New York Stock Exchange and the Frankfurt Stock Exchange, and will seek inclusion in the S&P 500 and DAX 30 indices.

Completion of the Business Combination remains subject to approval by requisite governmental regulators and authorities, including approvals under applicable competition laws.

The Business Combination Agreement, or certain covenants contained therein, may be terminated for, or may terminate as a result of, certain reasons, including, among others, (a) the mutual consent of Praxair, Inc. and Linde AG to termination, (b) a permanent injunction or order by any governmental entity in Ireland, the United Kingdom, Germany or the United States that prohibits or makes illegal the completion of the Business Combination, (c) the occurrence of a change, event, occurrence or effect that has had or is reasonably expected to have a “material adverse change” (as defined in the Business Combination Agreement) on Linde AG or Praxair, Inc. or (d) the failure to obtain approval by requisite governmental regulators and authorities described in the preceding paragraph.

For additional information related to the Business Combination Agreement, please refer to the proxy statement/prospectus filed by Praxair, Inc. on Schedule 14A with the SEC on August 16, 2017.

25


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

The following table provides summary data for the quarter ended March 31, 2018 and 2017:
  
Quarter Ended March 31,
 
(Dollar amounts in millions, except per share data)
2018
 
2017 (c)
 
Variance
 
Reported Amounts
 
 
 
 
 
 
Sales
$
2,999

 
$
2,728

 
10
 %
 
Cost of sales, exclusive of depreciation and amortization
$
1,677

 
$
1,549

 
8
 %
 
Gross margin (a)
$
1,322

 
$
1,179

 
12
 %
 
As a percent of sales
44.1
%
 
43.2
%
 
 
 
Selling, general and administrative
$
310

 
$
290

 
7
 %
 
As a percent of sales
10.3
%
 
10.6
%
 
 
 
Depreciation and amortization
$
311

 
$
287

 
8
 %
 
Transaction costs and other charges (b)
$
19

 
$
6

 


 
Other income (expense) - net
$
(5
)
 
$
(6
)
 
 
 
Operating profit
$
653

 
$
567

 
15
 %
 
Operating margin
21.8
%
 
20.8
%
 
 
 
Interest expense - net
$
46

 
$
41

 
12
 %
 
Net pension and OPEB cost (benefit), excluding service cost
$
2

 
$
(15
)
 
 
 
Effective tax rate
24.5
%
 
27.5
%
 
 
 
Income from equity investments
$
15

 
$
12

 
25
 %
 
Noncontrolling interests
$
(10
)
 
$
(15
)
 
(33
)%
 
Net income - Praxair, Inc.
$
462

 
$
389

 
19
 %
 
Diluted earnings per share
$
1.59

 
$
1.35

 
18
 %
 
Diluted shares outstanding
290,809

 
287,384

 
1
 %
 
Number of employees
26,550

 
26,420

 
 
 
Adjusted Amounts (b)
 
 
 
 
 
 
Operating profit
$
672

 
$
573

 
17
 %
 
Operating margin
22.4
%
 
21.0
%
 
 
 
Effective tax rate
24.0
%
 
27.2
%
 
 
 
Noncontrolling interests
$
(9
)
 
$
(15
)
 
(40
)%
 
Net income - Praxair, Inc.
$
480

 
$
395

 
22
 %
 
Diluted earnings per share
$
1.65

 
$
1.37

 
20
 %
 
Other Financial Data (b)
 
 
 
 
 
 
EBITDA
$
979

 
$
866

 
 
 
EBITDA Margin
32.6
%
 
31.7
%
 
 
 
Adjusted EBITDA
$
998

 
$
872

 
 
 
Adjusted EBITDA Margin
33.3
%
 
32.0
%
 
 
 
 
(a)
Gross margin excludes depreciation and amortization expense.
(b)
Adjusted amounts and other financial data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts and other financial data can be found in the "Non-GAAP Financial Measures" section of this MD&A. See Note 2 to the condensed consolidated financial statements.
(c)
Prior period information has been reclassified to conform with current year presentation as a result of the adoption of new accounting guidance on the presentation of net periodic pension and postretirement benefit costs. See Note 1 to the condensed consolidation financial statements.

26



Consolidated Results

In the first quarter of 2018, Praxair’s sales were $2,999 million, 10% above the prior–year quarter. Excluding favorable currency translation sales growth of 7% was driven by higher volumes across all segments, including new project start-ups, and price attainment. Reported operating profit for the first quarter of 2018 of $653 million, 21.8% of sales, was 15% above $567 million in the prior-year quarter. Operating profit included transaction and other costs of $19 million primarily related to the potential Linde merger. Excluding these costs, adjusted operating profit was $672 million, 22.4% of sales and 17% above the 2017 adjusted first quarter driven by higher volumes and price. The company's EBITDA margin was 32.6% and adjusted EBITDA margin was 33.3%. The reported effective tax rate ("ETR") was 24.5% versus 27.5% in the first quarter of 2017. The adjusted ETR was 24.0% versus 27.2% in the first quarter of 2017, reflecting the impact of U.S. tax reform. Diluted earnings per share ("EPS") was $1.59, 18% above reported EPS of $1.35 in the first quarter of 2017. On an adjusted basis, EPS was $1.65, 20% above the 2017 EPS of $1.37, driven by higher adjusted net income and a lower adjusted ETR.
Outlook

Diluted EPS for the second quarter of 2018 is expected to be in the range of $1.67 to $1.72 excluding transaction costs related to the potential Linde merger. The effective tax rate is estimated to be in the range of 23% to 25%.

The company’s core business is to build, own, and operate industrial gas plants in order to supply atmospheric and process gases to customers. As such, Praxair believes that its backlog is one indicator of future sales growth. At March 31, 2018, Praxair’s backlog of 16 large projects under construction was $1.5 billion. This represents the total estimated capital cost of large plants under construction. These plants will supply customers in the energy, chemical, manufacturing, and electronics end-markets.

Praxair provides quarterly updates on operating results, material trends that may affect financial performance, and financial earnings guidance via quarterly earnings releases and investor teleconferences. These updates are available on the company’s website, www.praxair.com, but are not incorporated herein.


27


Results of Operations
The changes in consolidated sales and operating profit compared to the prior year are attributable to the following:
 
 
Quarter Ended March 31, 2018 vs. 2017
 
 
% Change
 
 
Sales
 
Operating Profit
 
Factors Contributing to Changes
 
 
 
 
Volume
5
%
 
10
 %
 
Price/Mix
2
%
 
8
 %
 
Cost pass-through
%
 
 %
 
Currency
3
%
 
3
 %
 
Acquisitions/divestitures
%
 
 %
 
Other
%
 
(6
)%
 
Reported
10
%
 
15
 %
 
Add: Transaction costs and other charges
%
 
2
 %
 
Adjusted
10
%
 
17
 %
 
The following tables provide sales by end-market and distribution method:
 
 
Quarter Ended March 31,
 
% of Sales
 
% Change*
 
2018
 
2017
 
Sales by End Markets
 
 
 
 
 
Manufacturing
23
%
 
23
%
 
6
%
Metals
17
%
 
17
%
 
9
%
Energy
11
%
 
12
%
 
1
%
Chemicals
11
%
 
10
%
 
14
%
Electronics
9
%
 
9
%
 
10
%
Healthcare
8
%
 
8
%
 
6
%
Food & Beverage
9
%
 
9
%
 
6
%
Aerospace
3
%
 
3
%
 
8
%
Other
9
%
 
9
%
 
%
 
100
%
 
100
%
 
 
 * Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
 
 
Quarter Ended March 31,
 
 
% of Sales
 
 
2018
 
2017
 
Sales by Distribution Method
 
 
 
 
On-Site
30
%
 
30
%
 
Merchant
34
%
 
34
%
 
Packaged Gas
27
%
 
27
%
 
Other
9
%
 
9
%
 
 
100
%
 
100
%
 

Sales increased $271 million, or 10%, for the first quarter versus the respective 2017 period. Favorable currency translation, primarily in Europe, increased sales by 3%. Volume growth contributed 5% to sales driven by higher volumes in North America and Asia, including new project start-ups. Higher overall pricing across all segments contributed 2% to sales.


28


Gross margin increased $143 million, or 12%, for the first quarter of 2018 versus the respective 2017 period, primarily due to higher volumes and price. Gross margin as a percentage of sales increased to 44.1% from 43.2% for the first quarter of 2018 versus the respective 2017 period.

Selling, general and administrative expense ("SG&A") increased $20 million, or 7%, for the first quarter of 2018 versus the respective 2017 period. Currency impacts increased SG&A $9 million for the quarter. Excluding currency effects, SG&A was higher driven by cost inflation partially offset by cost reduction actions.

Depreciation and amortization expense increased $24 million, or 8%, for the first quarter of 2018 versus the respective 2017 period. Currency impacts increased depreciation and amortization by $10 million. Excluding currency effects, depreciation and amortization expense increased $14 million primarily driven by large project start-ups.

Praxair recorded transaction costs and other charges of $19 million and $6 million in the first quarters of 2018 and 2017, respectively, primarily related to the potential merger (refer to Note 2 to the condensed consolidated financial statements).

Other income (expense) – net was $5 million expense for the 2018 first quarter compared to $6 million expense for the 2017 first quarter. In Asia, the first quarter of 2018 included a $22 million asset impairment charge, offset by a litigation settlement gain.

Reported operating profit increased $86 million, or 15%, for the first quarter of 2018 versus the respective 2017 period. The first quarters of 2018 and 2017 include $19 million and $6 million, respectively, of transaction costs and other charges primarily related to the potential merger. Excluding these charges, adjusted operating profit increased $99 million, or 17%, for the first quarter of 2018 versus the respective 2017 period driven by higher volumes and price.

Interest expense-net increased $5 million, or 12%, for the first quarter of 2018 versus the respective 2017 periods. This increase was primarily attributable to lower capitalized interest.

The reported effective tax rate ("ETR") for the first quarter of 2018 and 2017 was 24.5% and 27.5%, respectively. The reported ETR for the first quarter of 2018 includes transaction costs and other charge of $19 million ($17 million after-tax) related to the potential merger. The reported ETR for the 2017 quarter includes $6 million of non-deductible transaction costs related to the potential merger. Excluding these impacts, on an adjusted basis the ETR for the first quarters of 2018 and 2017 was 24.0% and 27.2%, respectively. The decrease was driven primarily by the impact of the U.S. Tax Cuts and Jobs act enacted in the fourth quarter of 2017 (see Note 16 to the condensed consolidated financial statements).

Income from equity investments for the first quarter of 2018 and 2017 was $15 million and $12 million, respectively, largely in China and Italy.

At March 31, 2018, non-controlling interests consisted primarily of non-controlling shareholders' investments in Asia (primarily China), Europe (primarily Italy) and surface technologies. Reported non-controlling interests decreased $5 million for the first quarter of 2018 versus the respective 2017 period as higher earnings were more than offset by the impact of an asset impairment charge.

Reported Net income-Praxair, Inc. increased $73 million, or 19%, for the first quarter of 2018 versus the respective 2017 period. Included within the first quarter of 2018 were transaction costs and other charges of $18 million after-tax and noncontrolling interests. Included within the first quarter 2017 were transaction costs and other charges of $6 million after-tax (see Note 2 to the condensed consolidated financial statements). Excluding these charges, adjusted Net income-Praxair, Inc increased $85 million, or 22%, for the first quarter of 2018 due to higher adjusted operating profit and a lower effective tax rate.

Reported Earnings per share of $1.59 increased $0.24, or 18%, for the first quarter of 2018 versus the respective 2017 period. Included within the 2018 and 2017 first quarters were charges of $0.06 and $0.02, respectively, for transaction costs and other charges related primarily to the potential merger (see Note 2 to the condensed consolidated financial statements). Excluding these charges, adjusted EPS increased $0.28, or 20% for the first quarter of 2018 versus prior year primarily due to higher adjusted net income.

The number of employees at March 31, 2018 was 26,550, an increase of 130 employees from March 31, 2017.




29



Other Financial Data

EBITDA increased $113 million to $979 million for the first quarter 2018 from $866 million for the first quarter 2017. Adjusted EBITDA increased $126 million to $998 million for the first quarter 2018 from $872 million for the first quarter 2017. The increase in EBITDA and adjusted EBITDA in the quarter is primarily due to higher net income plus depreciation and amortization on both a reported and adjusted basis versus the prior year periods.

See the "Non-GAAP Financial Measures" section below for definitions and reconciliations of these non-GAAP measures to reported GAAP amounts.
Other Comprehensive Income (Loss)

Other comprehensive income for the three months ended March 31, 2018 of $129 million resulted primarily from currency translation adjustments. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars. Generally, positive translation adjustments result from the weakening of the U.S. dollar against most major currencies, while negative translation adjustments result from a strengthening of the U.S. dollar. See the "Currency" section of the MD&A for exchange rates used for translation purposes and Note 14 to the condensed consolidated financial statements for a summary of the currency translation adjustment component of accumulated other comprehensive income by segment.

Retirement Benefits

The net periodic benefit cost for pension and OPEB plans was a $14 million cost for the quarter ended March 31, 2018 versus a $3 million benefit in the respective 2017 period. The increase in expense versus the prior year for the three months ended March 31, 2018 is related to a curtailment gain recorded in the first quarter of 2017 on a South American OPEB plan for $18 million (see Note 11 to the condensed consolidated financial statements).

Segment Discussion
The following summary of sales and operating profit by segment provides a basis for the discussion that follows.
 
 
Quarter Ended March 31,
(Dollar amounts in millions)
2018
 
2017*
 
Variance
SALES
 
 
 
 
 
North America
$
1,563

 
$
1,458

 
7
 %
Europe
428

 
356

 
20
 %
South America
365

 
369

 
(1
)%
Asia
476

 
395

 
21
 %
Surface Technologies
167

 
150

 
11
 %
 
$
2,999

 
$
2,728

 
10
 %
OPERATING PROFIT
 
 
 
 
 
North America
$
406

 
$
357

 
14
 %
Europe
80