10-Q 1 px-q2201810q.htm PRAXAIR, INC. 2018 SECOND QUARTER FORM 10-Q Document

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended June 30, 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 June 30, 2018, 287,575,784 shares of common stock ($0.01 par value) of the Registrant were outstanding.
 



INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
 
 
 
 
 
 
 
 
 
 
 
 
 

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





PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED) 

 
Quarter Ended June 30,
 
2018
 
2017
SALES
$
3,061

 
$
2,834

Cost of sales, exclusive of depreciation and amortization
1,723

 
1,599

Selling, general and administrative
307

 
305

Depreciation and amortization
311

 
292

Research and development
24

 
23

Transaction costs and other charges
24

 
15

Other income (expense) - net
17

 
6

OPERATING PROFIT
689

 
606

Interest expense - net
44

 
38

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

 
2

INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
643

 
566

Income taxes
158

 
157

INCOME BEFORE EQUITY INVESTMENTS
485

 
409

Income from equity investments
14

 
11

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
499

 
420

Less: noncontrolling interests
(19
)
 
(14
)
NET INCOME - PRAXAIR, INC.
$
480

 
$
406

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
1.67

 
$
1.42

Diluted earnings per share
$
1.65

 
$
1.41

Cash dividends per share
$
0.825

 
$
0.7875

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
287,803

 
286,090

Diluted shares outstanding
290,908

 
288,535

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


3


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED)
 
 
Six months ended June 30,
 
2018
 
2017
SALES
$
6,060

 
$
5,562

Cost of sales, exclusive of depreciation and amortization
3,400

 
3,148

Selling, general and administrative
617

 
595

Depreciation and amortization
622

 
579

Research and development
48

 
46

Transaction costs and other charges

43

 
21

Other income (expense) - net
12

 

OPERATING PROFIT
1,342

 
1,173

Interest expense - net
90

 
79

Net pension and OPEB cost (benefit), excluding service cost
4

 
(13
)
INCOME BEFORE INCOME TAXES AND EQUITY INVESTMENTS
1,248

 
1,107

Income taxes
306

 
306

INCOME BEFORE EQUITY INVESTMENTS
942

 
801

Income from equity investments
29

 
23

NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
971

 
824

Less: noncontrolling interests
(29
)
 
(29
)
NET INCOME - PRAXAIR, INC.
$
942

 
$
795

PER SHARE DATA - PRAXAIR, INC. SHAREHOLDERS
 
 
 
Basic earnings per share
$
3.27

 
$
2.78

Diluted earnings per share
$
3.24

 
$
2.76

Cash dividends per share
$
1.65

 
$
1.575

WEIGHTED AVERAGE SHARES OUTSTANDING (000’s):
 
 
 
Basic shares outstanding
287,654

 
285,799

Diluted shares outstanding
290,926

 
288,067

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


4


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended June 30,
 
2018
 
2017
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
499

 
$
420

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(640
)
 
(1
)
Income taxes
(3
)
 
55

Translation adjustments
(643
)
 
54

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(9
)
 
(17
)
Reclassifications to net income
17

 
16

Income taxes
(2
)
 
1

Funded status - retirement obligations
6

 

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

 
1

Reclassifications to net income

 

Income taxes

 
(1
)
Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(637
)
 
54

 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
(138
)
 
474

Less: noncontrolling interests
2

 
(27
)
COMPREHENSIVE INCOME (LOSS) - PRAXAIR, INC.
$
(136
)
 
$
447

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


5


PRAXAIR, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(Millions of dollars)
(UNAUDITED)
 
 
Six months ended June 30,
 
2018
 
2017
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
971

 
$
824

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
 Foreign currency translation adjustments
(534
)
 
316

 Income taxes
6

 
58

Translation adjustments
(528
)
 
374

Funded status - retirement obligations (Note 11):
 
 
 
Retirement program remeasurements
(8
)
 
(20
)
Reclassifications to net income
34

 
20

Income taxes
(6
)
 

Funded status - retirement obligations
20

 

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

 

Reclassifications to net income

 

Income taxes

 

Derivative instruments

 

TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(508
)
 
374

 
 
 
 
COMPREHENSIVE INCOME (INCLUDING NONCONTROLLING INTERESTS)
463

 
1,198

Less: noncontrolling interests
(19
)
 
(47
)
COMPREHENSIVE INCOME - PRAXAIR, INC.
$
444

 
$
1,151

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


6


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
June 30, 2018
 
December 31, 2017
ASSETS
 
 
 
Cash and cash equivalents
$
479

 
$
617

Accounts receivable - net
1,877

 
1,804

Inventories
606

 
614

Prepaid and other current assets
202

 
250

TOTAL CURRENT ASSETS
3,164

 
3,285

Property, plant and equipment (less accumulated depreciation of $13,821 in 2018 and $13,819 in 2017)
11,701

 
12,057

Goodwill
3,200

 
3,233

Other intangible assets - net
525

 
553

Other long-term assets
1,246

 
1,308

TOTAL ASSETS
$
19,836

 
$
20,436

LIABILITIES AND EQUITY
 
 
 
Accounts payable
$
967

 
$
972

Short-term debt
250

 
238

Current portion of long-term debt
979

 
979

Other current liabilities
1,083

 
1,118

TOTAL CURRENT LIABILITIES
3,279

 
3,307

Long-term debt
7,229

 
7,783

Other long-term liabilities
2,786

 
2,824

TOTAL LIABILITIES
13,294

 
13,914

Commitments and contingencies (Note 12)

 

Redeemable noncontrolling interests (Note 14)
14

 
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
4,066

 
4,084

Retained earnings
13,690

 
13,224

Accumulated other comprehensive income (loss) (Note 14)
(4,596
)
 
(4,098
)
Less: Treasury stock, at cost (2018 - 95,654,841 shares and 2017 - 96,453,634 shares)
(7,137
)
 
(7,196
)
Total Praxair, Inc. Shareholders’ Equity
6,027

 
6,018

Noncontrolling interests
501

 
493

TOTAL EQUITY
6,528

 
6,511

TOTAL LIABILITIES AND EQUITY
$
19,836

 
$
20,436

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


7


PRAXAIR, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
 
 
Six months ended June 30,
 
2018
 
2017
OPERATIONS
 
 
 
Net income - Praxair, Inc.
$
942

 
$
795

Noncontrolling interests
29

 
29

Net income (including noncontrolling interests)
971

 
824

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Transaction costs and other charges, net of payments
15

 
17

Depreciation and amortization
622

 
579

Deferred income taxes
10

 
48

Share-based compensation
21

 
28

Working capital:
 
 
 
Accounts receivable
(147
)
 
(95
)
Inventory
(10
)
 
(5
)
Prepaid and other current assets
25

 
(40
)
Payables and accruals
(6
)
 
(24
)
Pension contributions
(10
)
 
(6
)
Long-term assets, liabilities and other
(13
)
 
85

Net cash provided by operating activities
1,478

 
1,411

INVESTING
 
 
 
Capital expenditures
(676
)
 
(652
)
Acquisitions, net of cash acquired

 
(2
)
Divestitures and asset sales
69

 
17

Net cash used for investing activities
(607
)
 
(637
)
FINANCING
 
 
 
Short-term debt borrowings (repayments) - net
13

 
(157
)
Long-term debt borrowings

 
10

Long-term debt repayments
(505
)
 
(158
)
Issuances of common stock
44

 
70

Purchases of common stock
(1
)
 
(11
)
Cash dividends - Praxair, Inc. shareholders
(474
)
 
(450
)
Noncontrolling interest transactions and other
(22
)
 
(84
)
Net cash provided by (used for) financing activities
(945
)
 
(780
)
Effect of exchange rate changes on cash and cash equivalents
(64
)
 
17

Change in cash and cash equivalents
(138
)
 
11

Cash and cash equivalents, beginning-of-period
617

 
524

Cash and cash equivalents, end-of-period
$
479

 
$
535

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 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.

10


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). Praxair incurred transaction costs and other charges primarily in connection with the intended business combination totaling $24 million and $43 million for the quarter and six months ended June 30, 2018 ($21 million and $39 million after-tax and noncontrolling interests, or $0.07 and $0.13 per diluted share), respectively. Praxair incurred transaction costs which totaled $15 million and $21 million after-tax for the quarter and six months ended June 30, 2017 ($0.05 and $0.07 per diluted share), respectively.

Classification in the condensed consolidated financial statements
The costs are shown within operating profit in a separate line item on the consolidated statements of income. On the condensed consolidated statement of cash flows, the impact of these costs, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 13 - Segments, Praxair excluded these costs from its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the segment operating profit table.
 
3. Acquisitions
Acquisition activity was immaterial for the quarter and six month periods ending June 30, 2018 and June 30, 2017.

4. Supplemental Information
Inventories
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
June 30,
2018
 
December 31,
2017
Inventories
 
 
 
Raw materials and supplies
$
222

 
$
224

Work in process
54

 
57

Finished goods
330

 
333

Total inventories
$
606

 
$
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 $32 million and $54 million at June 30, 2018 and December 31, 2017, respectively. These amounts are net of reserves of $46 million and $51 million, respectively. The amounts

11


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.

5. Debt
The following is a summary of Praxair’s outstanding debt at June 30, 2018 and December 31, 2017:
(Millions of dollars)
June 30,
2018
 
December 31,
2017
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
214

 
$
202

Other bank borrowings (primarily international)
36

 
36

Total short-term debt
250

 
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

1.90% Notes due 2019
500

 
500

4.50% Notes due 2019
599

 
599

1.50% Euro-denominated notes due 2020
699

 
717

2.25% Notes due 2020
299

 
299

4.05% Notes due 2021
498

 
498

3.00% Notes due 2021
498

 
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
640

 
658

2.65% Notes due 2025
398

 
397

1.625% Euro-denominated notes due 2025
578

 
594

3.20% Notes due 2026
725

 
725

3.55% Notes due 2042
662

 
662

Other
10

 
12

International bank borrowings
30

 
33

Obligations under capital leases
4

 
4

 
8,208

 
8,762

Less: current portion of long-term debt
(979
)
 
(979
)
Total long-term debt
7,229

 
7,783

Total debt
$
8,458

 
$
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)
June 30, 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.
In June 2018, the company's $500 million 364-day revolving credit facility with a syndicate of banks expired and was not renewed.


12


6. Financial Instruments
In its normal operations, Praxair is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Praxair is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Praxair routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Praxair only uses commonly traded and non-leveraged instruments.
There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.
Counterparties to Praxair’s derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at June 30, 2018 and December 31, 2017 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets
 
Liabilities
(Millions of dollars)
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items (a)
$
2,266

 
$
2,693

 
$
6

 
$
16

 
$
25

 
$
16

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

 
$
38

 
$

 
$

 
$

 
$
2

       Forecasted purchases (a)
2

 
4

 

 
1

 

 

Interest rate contracts:
 
 
 
 
 
 
 
 
 
 
 
Interest rate swaps (a)
475

 
475

 

 

 
1

 

Total Hedges
$
477

 
$
517

 
$

 
$
1

 
$
1

 
$
2

Total Derivatives
$
2,743

 
$
3,210

 
$
6

 
$
17

 
$
26

 
$
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

13


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

As of June 30, 2018, the Company has €1.65 billion ($1.92 billion) of Euro-denominated notes, of which €1.57 billion ($1.83 billion) is 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 $148 million (long-term debt decreased by $51 million during the first six months 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 June 30, 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 June 30, 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)
June 30,
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
)
 
(3
)
 
(4
)
$600 million 4.50% fixed-rate notes that mature in 2019 (b)
2009
 
16

 
2

 
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.


14


The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
 
Amount of Pre-Tax Gain (Loss)
Recognized in Earnings *
 
Quarter Ended June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2018
 
2017
 
2018
 
2017
Derivatives Not Designated as Hedging Instruments
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
 
 
 
 
 
 
 
Debt-related
$
(68
)
 
$
30

 
$
(32
)
 
$
109

Other balance sheet items
(1
)
 
1

 
1

 
2

Total
$
(69
)
 
$
31

 
$
(31
)
 
$
111


* 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)
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$

 
$

 
$

 
$

Forecasted purchases

 
1

 

 

Interest rate contracts:
 
 
 
 
 
 
 
Treasury rate lock contracts

 

 

 

Total - pre tax
$

 
$
1

 
$

 
$

Less: income taxes

 
(1
)
 

 

Total - Net of Taxes
$

 
$

 
$

 
$


 
Six Months Ended
 
Amount of Gain  (Loss)
Recognized in AOCI
 
Amount of Gain  (Loss)
Reclassified from AOCI to the Consolidated Statement of
Income
(Millions of dollars)
June 30,
2018
 
June 30,
2017
 
June 30,
2018
 
June 30,
2017
Currency contracts:
 
 
 
 
 
 
 
Balance sheet items
$

 
$
(1
)
 
$

 
$

Forecasted purchases

 
1

 

 

Interest rate contracts:
 
 
 
 
 
 
 
Treasury rate lock contracts

 

 

 

Total - pre tax
$

 
$

 
$

 
$

Less: income taxes

 

 

 

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

15


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:
 
Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
 
June 30,
2018
 
December 31,
2017
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
6

 
$
17

 

 

Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivatives

 

 
$
26

 
$
18

 

 

The fair values of the derivative assets and liabilities are based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. Investments are marketable securities traded on an exchange.
The fair values of cash and cash equivalents, short-term debt, accounts receivable-net, and accounts payable approximate carrying amounts because of the short maturities of these instruments. The fair value of long-term debt is estimated based on the quoted market prices for similar issues, which is deemed a level 2 measurement. At June 30, 2018, the estimated fair value of Praxair’s long-term debt portfolio was $8,216 million versus a carrying value of $8,208 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:

16


 
Quarter Ended June 30,
Six Months Ended June 30,
 
2018
 
2017
2018
 
2017
Numerator (Millions of dollars)
 
 
 
 
 
 
Net income - Praxair, Inc.
$
480

 
$
406

$
942

 
$
795

Denominator (Thousands of shares)
 
 
 
 
 
 
Weighted average shares outstanding
287,467

 
285,719

287,321

 
285,429

Shares earned and issuable under compensation plans
336

 
371

333

 
370

Weighted average shares used in basic earnings per share
287,803

 
286,090

287,654

 
285,799

Effect of dilutive securities
 
 
 
 
 
 
Stock options and awards
3,105

 
2,445

3,272

 
2,268

Weighted average shares used in diluted earnings per share
290,908

 
288,535

290,926

 
288,067

Basic Earnings Per Share
$
1.67

 
$
1.42

$
3.27

 
$
2.78

Diluted Earnings Per Share
$
1.65

 
$
1.41

$
3.24

 
$
2.76

There were no antidilutive shares for the quarter and six months ended June 30, 2018. Stock options of 2,508,472 and 2,509,162 for the quarter and six months ended June 30, 2017 were antidilutive and therefore excluded in the computation of diluted earnings per share.
9. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the six months ended June 30, 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
(7
)
 
(22
)
 
(12
)
 
(1
)
 
(3
)
 
(45
)
Balance, June 30, 2018
$
2,207

 
$
107

 
$
686

 
$
60

 
$
140

 
$
3,200


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 2018 test completed this quarter, Praxair applied the FASB's accounting guidance 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 (refer to Note 1 to the consolidated financial statements of Praxair's 2017 Annual Report on Form 10-K). Based on the qualitative assessments performed in the second quarter of 2018, Praxair concluded that it was more likely than not that the fair value of each reporting unit substantially exceeded its carrying value and therefore, further quantitative analysis was not required. As a result, no impairment was recorded. There were no indicators of impairment through June 30, 2018.
Changes in the carrying amounts of other intangibles for the six months ended June 30, 2018 were as follows:

17


(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
(6
)
 

 

 
(6
)
Other*
(20
)
 
(5
)
 

 
(25
)
Balance, June 30, 2018
$
746

 
$
23

 
$
52

 
$
821

Less: Accumulated amortization
 
 
 
 
 
 
 
Balance, December 31, 2017
$
(260
)
 
$
(18
)
 
$
(21
)
 
$
(299
)
Amortization expense
(19
)
 
(2
)
 
(2
)
 
(23
)
Foreign currency translation
2

 

 

 
2

Other*
19

 
5

 

 
24

Balance, June 30, 2018
$
(258
)
 
$
(15
)
 
$
(23
)
 
$
(296
)
Net balance at June 30, 2018
$
488

 
$
8

 
$
29

 
$
525


* 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
$
22

2019
43

2020
41

2021
39

2022
38

Thereafter
342

 
$
525


18


10. Share-Based Compensation
Share-based compensation expense of $17 million ($12 million after-tax) and $16 million ($1 million after-tax) was recognized during the quarters ended June 30, 2018 and 2017, respectively. The 2018 and 2017 quarters include $2 million and $10 million of excess tax benefits, respectively. Share-based compensation of $21 million ($2 million after-tax) and $28 million ($5 million after-tax) was recognized during the six months ended June 30, 2018 and 2017, respectively. The 2018 and 2017 six-month periods include $15 million and $14 million, respectively, of excess tax benefits. 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 six months ended June 30, 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:
 
Six months ended June 30,
 
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 June 30, 2018 and changes during the six-month period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):
 
Number of
Options  (000’s)
 
Average
Exercise Price
 
Average
Remaining
Life
 
Aggregate
Intrinsic
Value
Outstanding at January 1, 2018
10,787

 
$
108.70

 
 
 
 
Granted
1,625

 
154.00

 
 
 
 
Exercised
(1,136
)
 
92.29

 
 
 
 
Cancelled or Expired
(35
)
 
126.27

 
 
 
 
Outstanding at June 30, 2018
11,241

 
116.86

 
6.3
 
$
464

Exercisable at June 30, 2018
7,521

 
$
110.02

 
5.2
 
$
362

The aggregate intrinsic value represents the difference between the company’s closing stock price of $158.15 as of June 30, 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 and six months ended June 30, 2018 was $14 million and $77 million, respectively ($45 million and $63 million during the same periods in 2017, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and six months ended June 30, 2018 was $12 million and $38 million, respectively ($44 million and $63 million for the same periods in 2017). The cash tax benefit realized from share-based compensation totaled $5 million and $19 million for the quarter and six months ended June 30, 2018, respectively ($18 million and $26 million for the same periods in 2017, respectively).
As of June 30, 2018, $33 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.
Performance-Based and Restricted Stock Awards
During the six months ended June 30, 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 six months ended June 30, 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 June 30, 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

19


issued in settlement of a vested award can range from zero to 200 percent of the target number of shares granted based upon the company’s attainment of specified performance targets at the end of a three-year period. Compensation expense related to these awards is recognized over the three-year performance period based on the fair value of the closing market price of the company’s common stock on the date of the grant and the estimated performance that will be achieved. Compensation expense for ROC awards will be adjusted during the three-year performance period based upon the estimated performance levels that will be achieved. TSR awards are measured at their grant date fair value and not subsequently re-measured.
The weighted-average fair value of restricted stock units granted during the six months ended June 30, 2018 was $144.79 ($111.69 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 six months ended June 30, 2017 was $109.68.
The weighted-average fair value of performance-based stock tied to relative TSR performance granted during six months ended June 30, 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 June 30, 2018 and changes during the six months then ended (shares based on target amounts, averages are calculated on a weighted basis):
 
Performance-Based
 
Restricted Stock
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
 
Number  of
Shares
(000’s)
 
Average
Grant  Date
Fair Value
Non-vested at January 1, 2018
665

 
$
113.40

 
264

 
$
107.56

Granted

 

 
269

 
144.79

Vested
(78
)
 
119.98

 
(89
)
 
116.29

Cancelled and Forfeited
(150
)
 
110.12

 
(14
)
 
92.93

Non-vested at June 30, 2018
437

 
$
110.02

 
430

 
$
129.49

There are approximately 6 thousand performance-based shares and 3 thousand restricted stock shares that are non-vested at June 30, 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 June 30, 2018, based on current estimates of future performance, $11 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2020 and $36 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2021.

20


11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and six months ended June 30, 2018 and 2017 are shown below:
 
 
Quarter Ended June 30,
 
 
Six Months Ended June 30,
 
Pensions
 
OPEB
 
 
Pensions
 
OPEB
(Millions of dollars)
2018
 
2017
 
2018
 
2017
 
 
2018
 
2017
 
2018
 
2017
Amount recognized in Operating Profit
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Service cost
$
12

 
$
12

 
$
1

 
$
1

 
 
$
24

 
$
23

 
$
1

 
$
2

Amount recognized in Net pension and OPEB cost (benefit), excluding service cost
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Interest cost
25

 
25

 
1

 
1

 
 
51

 
51

 
2

 
2

Expected return on plan assets
(41
)
 
(40
)
 

 

 
 
(83
)
 
(80
)
 

 

Net amortization and deferral
18

 
17

 
(1
)
 
(1
)
 
 
36

 
34

 
(2
)
 
(2
)
Curtailment gain (a)

 

 

 

 
 

 

 

 
(18
)
 
$
2

 
$
2

 
$

 
$

 
 
$
4

 
$
5

 
$

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

 
$
14

 
$
1

 
$
1

 
 
$
28

 
$
28

 
$
1

 
$
(16
)

(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 $10 million have been made through June 30, 2018.


21


12. Commitments and Contingencies
Contingent Liabilities
Praxair is subject to various lawsuits and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Praxair has strong defenses in these cases and intends to defend itself vigorously. It is possible that the company may incur losses in connection with some of these actions in excess of accrued liabilities. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the company’s reported results of operations in any given period (see Note 17 to the consolidated financial statements of Praxair’s 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 June 30, 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 $210 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$570 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$440 million) due to a calculation error made by CADE. The amount of the fine is subject to indexation using SELIC. On September 2, 2010, Praxair issued a press release and filed a report on Form 8-K rejecting all claims and stating that the fine represents a gross and arbitrary disregard of Brazilian law.
On October 19, 2010, White Martins filed an annulment petition (“appeal”) with the Federal Court in Brasilia seeking to have the fine against White Martins entirely overturned. In order to suspend payment of the fine pending the completion of the appeal process, Brazilian law required that the company tender a form of guarantee in the amount of the fine as security. Initially, 50% of the guarantee was satisfied by letters of credit with a financial institution and 50% by equity of a Brazilian subsidiary. On April 15, 2016, the Ninth Federal Court in Brasilia allowed White Martins to withdraw and cancel the letters of credit. Accordingly, the guarantee is currently satisfied solely by equity of a Brazilian subsidiary.
On September 14, 2015, the Ninth Federal Court of Brasilia overturned the fine against White Martins and declared the original CADE administrative proceeding to be null and void. On June 30, 2016, CADE filed an appeal against this decision with the Federal Circuit Court in Brasilia.
Praxair strongly believes that the allegations are without merit and that the fine will be entirely overturned during the appeal process. The company further believes that it has strong defenses and will vigorously defend against the allegations and related fine up to such levels of the Federal Courts in Brazil as may be necessary. Because appeals in Brazil historically take many years to resolve, it is very difficult to estimate when the appeal will be finally decided. Based on management judgments, after considering judgments and opinions of outside counsel, no reserve has been recorded for this proceeding as management does not believe that a loss is probable.

22


13. Segments
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 and six months ended June 30, 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 June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2018
 
2017
 
2018
 
2017
SALES(a) 
 
 
 
 
 
 
 
North America
$
1,594

 
$
1,505

 
$
3,157

 
$
2,963

Europe
444

 
383

 
872

 
739

South America
349

 
373

 
714

 
742

Asia
502

 
422

 
978

 
817

Surface Technologies
172

 
151

 
339

 
301

Total sales
$
3,061

 
$
2,834

 
$
6,060

 
$
5,562

  
Quarter Ended June 30,
 
Six Months Ended June 30,
(Millions of dollars)
2018
 
2017
 
2018
 
2017
OPERATING PROFIT
 
 
 
 
 
 
 
North America
$
432

 
$
378

 
$
838

 
$
735

Europe
87

 
74

 
167

 
141

South America
56

 
64

 
110

 
112

Asia
107

 
80

 
211

 
155

Surface Technologies
31

 
25

 
59

 
51

Segment operating profit
713

 
621

 
1,385

 
1,194

Transaction costs and other charges (Note 2)
(24
)
 
(15
)
 
(43
)
 
(21
)
Total operating profit
$
689

 
$
606

 
$
1,342

 
$
1,173

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


23



14. Equity and Redeemable Noncontrolling Interests
Equity
A summary of the changes in total equity for the quarters and six months ended June 30, 2018 and 2017 is provided below:

Quarter Ended June 30,
(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
$
6,368

 
$
516

 
$
6,884

 
$
5,529

 
$
436

 
$
5,965

Net income (a)
480

 
18

 
498

 
406

 
13

 
419

Other comprehensive income (loss)
(616
)
 
(21
)
 
(637
)
 
41

 
13

 
54

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
1

 
1

 

 
7

 
7

Dividends and other capital changes

 
(13
)
 
(13
)
 

 
(16
)
 
(16
)
Redemption value adjustments

 

 

 

 

 

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
1

 

 
1

 
1

 

 
1

For employee savings and incentive plans
15

 

 
15

 
39

 

 
39

Purchases of common stock
(1
)
 

 
(1
)
 

 

 

Share-based compensation
17

 

 
17

 
16

 

 
16

Balance, end of period
$
6,027

 
$
501

 
$
6,528

 
$
5,807

 
$
453

 
$
6,260


24


 
Six Months Ended June 30,
(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)
942

 
27

 
969

 
795

 
28

 
823

Other comprehensive income (loss)
(498
)
 
(10
)
 
(508
)
 
356

 
18

 
374

Noncontrolling interests:
 
 
 
 
 
 
 
 
 
 
 
Additions (reductions)

 
7

 
7

 

 
7

 
7

Dividends and other capital changes

 
(16
)
 
(16
)
 

 
(20
)
 
(20
)
Redemption value adjustments
(2
)
 

 
(2
)
 

 

 

Dividends to Praxair, Inc. common stock holders ($1.65 per share in 2018 and $1.575 per share in 2017)
(474
)
 

 
(474
)
 
(450
)
 

 
(450
)
Issuances of common stock:
 
 
 
 
 
 
 
 
 
 
 
For the dividend reinvestment and stock purchase plan
3

 

 
3

 
3

 

 
3

For employee savings and incentive plans
18

 

 
18

 
54

 

 
54

       Other

 

 

 

 

 

Purchases of common stock
(1
)
 

 
(1
)
 

 

 

Share-based compensation
21

 

 
21

 
28

 

 
28

Balance, end of period
$
6,027

 
$
501

 
$
6,528

 
$
5,807

 
$
453

 
$
6,260


(a)
Net income for noncontrolling interests excludes Net income related to redeemable noncontrolling interests of $2 million for the six months ended June 30, 2018 ($1 million 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:
 
June 30,
 
December 31,
(Millions of dollars)
2018
 
2017
Cumulative translation adjustment - net of taxes:
 
 
 
North America
$
(940
)
 
$
(885
)
South America
(2,319
)
 
(2,004
)
Europe
(433
)
 
(398
)
Asia
(254
)
 
(151
)
Surface Technologies
(27
)
 
(17
)
 
(3,973
)
 
(3,455
)
Derivatives - net of taxes
(1
)
 
(1
)
Pension / OPEB funded status obligation (net of $341 million and $347 million tax benefit in June 30, 2018 and December 31, 2017, respectively)
(622
)
 
(642
)
 
$
(4,596
)
 
$
(4,098
)

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 June 30, 2018 and 2017, redeemable noncontrolling interests includes one packaged gas distributor in the United States where the noncontrolling shareholder has a put option.

25


Following is a summary of the changes in redeemable noncontrolling interests for the six months ended June 30, 2018 and 2017: 
(Millions of dollars)
2018
 
2017
Balance, January 1
$
11

 
$
11