QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 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 September 30, 2018, 287,856,237 shares of common stock ($0.01 par value) of the Registrant were outstanding.
On October 31, 2018, Praxair, Inc. (“Praxair” or the “Company”) and Linde Aktiengesellschaft, a stock corporation incorporated under the laws of Germany (“Linde AG”), combined under Linde plc, a public limited company incorporated under the laws of Ireland (“Linde plc”), as contemplated by the business combination agreement, dated June 1, 2017, as amended on August 10, 2017 (the “Business Combination Agreement”), by and among the Company, Linde AG, Linde plc, Zamalight Holdco LLC and Zamalight Subco, Inc. Pursuant to the Business Combination Agreement, (i) Praxair became an indirect wholly-owned subsidiary of Linde plc through the merger of Zamalight Subco, Inc., an indirect wholly-owned Delaware subsidiary of Linde plc with and into Praxair, and (ii) Linde AG became an indirect subsidiary of Linde plc through an exchange offer by Linde plc for each issued and outstanding bearer share of Linde AG. On October 31, 2018, Linde plc filed a Current Report on Form 8-K with the Securities and Exchange Commission (“SEC”) that established Linde plc as the successor issuer to Praxair under the Securities Exchange Act of 1934, as amended (the “Exchange Act”).
This Quarterly Report on Form 10-Q relates to the Company's quarter ended September 30, 2018, which was prior to the completion of the Business Combination.
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.
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
Transaction costs and other charges were $31 million and $74 million ($29 million and $67 million after-tax and noncontrolling interest, or $0.10 and $0.23 per diluted share) for the quarter and nine months ended September 30, 2018, respectively. Transaction costs and other charges were $14 million and $35 million ($13 million and $34 million after-tax or $0.05 and $0.12 per diluted share) for the quarter and nine months ended September 30, 2017.
On October 31, 2018, Praxair and Linde AG combined under Linde plc, as contemplated by the Business Combination Agreement (see Note 17). Praxair incurred transaction costs and other charges primarily in connection with the intended business combination totaling $21 million and $64 million for the quarter and nine months ended September 30, 2018 ($19 million and $57 million after-tax and noncontrolling interests, or $0.07 and $0.20 per diluted share), respectively. Praxair incurred transaction costs which totaled $14 million and $35 million for the quarter and nine months ended September 30, 2017 ($13 million and $34 million after-tax, or $0.05 and $0.12 per diluted share), respectively.
Effective July 1, 2018, Argentina was deemed a highly inflationary economy. As a result, the third quarter of 2018 includes a $10 million charge ($10 million after-tax, or $0.03 per diluted share) associated with the transition to hyper-inflationary accounting in Argentina.
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
During the nine months ended September 30, 2018 and 2017, Praxair had acquisitions totaling $6 million and $18 million, respectively, related primarily to acquisitions of packaged gas businesses in North America.
The following is a summary of Praxair’s consolidated inventories:
(Millions of dollars)
September 30, 2018
December 31, 2017
Inventories
Raw materials and supplies
$
218
$
224
Work in process
54
57
Finished goods
350
333
Total inventories
$
622
$
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 $31 million and $54 million at September 30, 2018 and December 31, 2017, respectively. These amounts are net of reserves of $45 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.
The following is a summary of Praxair’s outstanding debt at September 30, 2018 and December 31, 2017:
(Millions of dollars)
September 30, 2018
December 31, 2017
SHORT-TERM
Commercial paper and U.S. bank borrowings
$
83
$
202
Other bank borrowings (primarily international)
32
36
Total short-term debt
115
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 (b, c)
475
475
1.90% Notes due 2019
500
500
4.50% Notes due 2019
599
599
1.50% Euro-denominated notes due 2020
694
717
2.25% Notes due 2020
299
299
4.05% Notes due 2021
499
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
636
658
2.65% Notes due 2025
398
397
1.625% Euro-denominated notes due 2025
574
594
3.20% Notes due 2026
725
725
3.55% Notes due 2042
662
662
Other
10
12
International bank borrowings
31
33
Obligations under capital leases
3
4
8,197
8,762
Less: current portion of long-term debt
(1,582
)
(979
)
Total long-term debt
6,615
7,783
Total debt
$
8,312
$
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. On November 7, 2018, Praxair repaid $475 million of 1.25% notes that became due.
(c)
September 30, 2018 and December 31, 2017 include a less than $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.
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
13
recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Praxair designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.
Counterparties to Praxair’s derivatives are major banking institutions with credit ratings of investment grade or better and no collateral is required, and there are no significant risk concentrations. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at September 30, 2018 and December 31, 2017 for consolidated subsidiaries:
Fair Value
Notional Amounts
Assets
Liabilities
(Millions of dollars)
September 30, 2018
December 31, 2017
September 30, 2018
December 31, 2017
September 30, 2018
December 31, 2017
Derivatives Not Designated as Hedging Instruments:
Currency contracts:
Balance sheet items (a)
$
2,099
$
2,693
$
16
$
16
$
6
$
16
Derivatives Designated as Hedging Instruments:
Currency contracts:
Balance sheet items (a)
$
—
$
38
$
—
$
—
$
—
$
2
Forecasted purchases (a)
6
4
—
1
—
—
Interest rate contracts:
Interest rate swaps (a, b)
475
475
—
—
—
—
Total Hedges
$
481
$
517
$
—
$
1
$
—
$
2
Total Derivatives
$
2,580
$
3,210
$
16
$
17
$
6
$
18
(a)
Assets are recorded in prepaid and other current assets, and liabilities are recorded in other current liabilities.
(b)
On November 7, 2018, Praxair repaid $475 million of 1.25% notes that became due and the associated interest rate swap was settled.
Currency Contracts
Balance Sheet Items
Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. Certain forward currency contracts are entered into to protect underlying monetary assets and liabilities denominated in foreign currencies from foreign exchange risk and are not designated as hedging instruments. The fair value adjustments on these contracts are offset by the fair value adjustments recorded on the underlying monetary assets and liabilities. Praxair also enters into forward currency contracts, which are designated as hedging 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
14
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 September 30, 2018, the Company has €1.65 billion ($1.92 billion) of Euro-denominated notes, of which €1.63 billion ($1.89 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 $162 million (long-term debt decreased by $65 million during the first nine 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 September 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 matured on November 7, 2018. The interest rate swap effectively converts fixed-rate interest to variable-rate interest and is designated as a fair value hedge. Fair value adjustments are recognized in earnings along with an equally offsetting charge / benefit to earnings for the changes in the fair value of the underlying debt instrument. At September 30, 2018, less than $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)
September 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
)
$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
1
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.
15
The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
Amount of Pre-Tax Gain (Loss)
Recognized in Earnings *
Quarter Ended September 30,
Nine Months Ended September 30,
(Millions of dollars)
2018
2017
2018
2017
Derivatives Not Designated as Hedging Instruments
Currency contracts:
Balance sheet items
Debt-related
$
17
$
19
$
(15
)
$
128
Other balance sheet items
3
(1
)
4
1
Total
$
20
$
18
$
(11
)
$
129
* 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)
September 30, 2018
September 30, 2017
September 30, 2018
September 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
$
—
$
—
$
—
$
—
Nine Months Ended
Amount of Gain (Loss) Recognized in AOCI
Amount of Gain (Loss) Reclassified from AOCI to the Consolidated Statement of Income
(Millions of dollars)
September 30, 2018
September 30, 2017
September 30, 2018
September 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
16
component of AOCI within derivative instruments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. There was no ineffectiveness for these instruments during 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 $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)
September 30, 2018
December 31, 2017
September 30, 2018
December 31, 2017
September 30, 2018
December 31, 2017
Assets
Derivatives
—
—
$
16
$
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 September 30, 2018, the estimated fair value of Praxair’s long-term debt portfolio was $8,164 million versus a carrying value of $8,197 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:
Shares earned and issuable under compensation plans
341
364
335
368
Weighted average shares used in basic earnings per share
288,093
286,467
287,800
286,022
Effect of dilutive securities
Stock options and awards
3,420
2,749
3,475
2,502
Weighted average shares used in diluted earnings per share
291,513
289,216
291,275
288,524
Basic Earnings Per Share
$
1.60
$
1.46
$
4.87
$
4.24
Diluted Earnings Per Share
$
1.58
$
1.45
$
4.82
$
4.21
There were no antidilutive shares for the quarter and nine months ended September 30, 2018. There were no antidilutive shares for the quarter ended September 30, 2017. Stock options of 2,439,499 for nine months ended September 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 nine months ended September 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
3
—
—
—
—
3
Purchase adjustments & other
12
—
—
—
—
12
Foreign currency translation
—
(27
)
(16
)
(1
)
(3
)
(47
)
Balance, September 30, 2018
$
2,217
$
102
$
682
$
60
$
140
$
3,201
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 last 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 September 30, 2018.
Changes in the carrying amounts of other intangibles for the nine months ended September 30, 2018 were as follows:
* 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:
Share-based compensation expense of $19 million and $16 million was recognized during the quarters ended September 30, 2018 and 2017, respectively. Share-based compensation of $40 million and $44 million was recognized during the nine months ended September 30, 2018 and 2017, 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 nine months ended September 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:
Nine months ended September 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 September 30, 2018 and changes during the nine-month period then ended (averages are calculated on a weighted basis; life in years; intrinsic value expressed in millions):
Number of
Options (000’s)
Average
Exercise Price
Average
Remaining
Life
Aggregate
Intrinsic
Value
Outstanding at January 1, 2018
10,787
$
108.70
Granted
1,625
154.00
Exercised
(1,502
)
94.50
Cancelled or Expired
(63
)
128.91
Outstanding at September 30, 2018
10,847
117.34
6.2
$
471
Exercisable at September 30, 2018
7,143
$
110.46
5.0
$
359
The aggregate intrinsic value represents the difference between the company’s closing stock price of $160.73 as of September 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 nine months ended September 30, 2018 was $19 million and $96 million, respectively ($17 million and $80 million during the same periods in 2017, respectively).
Cash received from option exercises under all share-based payment arrangements for the quarter and nine months ended September 30, 2018 was $21 million and $59 million, respectively ($18 million and $81 million for the same periods in 2017). The cash tax benefit realized from share-based compensation totaled $9 million and $28 million for the quarter and nine months ended September 30, 2018, respectively ($5 million and $31 million for the same periods in 2017, respectively).
As of September 30, 2018, $26 million of unrecognized compensation cost related to non-vested stock options is expected to be recognized over a weighted-average period of approximately 1 year.
Performance-Based and Restricted Stock Awards
During the nine months ended September 30, 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 nine months ended September 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 September 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 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 nine months ended September 30, 2018 was $144.79 ($111.70 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 nine months ended September 30, 2017 was $109.68.
The weighted-average fair value of performance-based stock tied to relative TSR performance granted during nine months ended September 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 September 30, 2018 and changes during the nine months then ended (shares based on target amounts, averages are calculated on a weighted basis):
Performance-Based
Restricted Stock
Number of
Shares
(000’s)
Average
Grant Date
Fair Value
Number of
Shares
(000’s)
Average
Grant Date
Fair Value
Non-vested at January 1, 2018
665
$
113.40
264
$
107.56
Granted
—
—
269
144.79
Vested
(78
)
119.98
(89
)
116.22
Cancelled and Forfeited
(151
)
110.32
(17
)
100.23
Non-vested at September 30, 2018
436
$
110.02
427
$
129.52
There are approximately 6 thousand performance-based shares and 3 thousand restricted stock shares that are non-vested at September 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 September 30, 2018, based on current estimates of future performance, $9 million of unrecognized compensation cost related to performance-based awards is expected to be recognized through the first quarter of 2020 and $30 million of unrecognized compensation cost related to the restricted stock awards is expected to be recognized primarily through the first quarter of 2021.
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and nine months ended September 30, 2018 and 2017 are shown below:
Quarter Ended September 30,
Nine Months Ended September 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
$
—
$
—
$
36
$
35
$
1
$
2
Amount recognized in Net pension and OPEB cost (benefit), excluding service cost
Interest cost
25
25
1
2
76
76
3
4
Expected return on plan assets
(42
)
(40
)
—
—
(125
)
(120
)
—
—
Net amortization and deferral
18
17
—
—
54
51
(2
)
(2
)
Curtailment gain (a)
—
—
—
—
—
—
—
(18
)
Settlement charge
4
2
$
—
$
—
4
2
$
—
$
—
$
5
$
4
$
1
$
2
$
9
$
9
$
1
$
(16
)
Net periodic benefit cost (benefit)
$
17
$
16
$
1
$
2
$
45
$
44
$
2
$
(14
)
(a) The curtailment gain recorded in the first quarter of 2017 resulted from the termination of an OPEB plan in South America.
In the third quarters of 2018 and 2017, a series of lump sum benefit payments made from the U.S. supplemental pension plan and an international pension plan, respectively, triggered settlements of the related pension obligations. Accordingly, Praxair recorded pension settlement charges of $4 million ($3 million after-tax or $0.01 per diluted share) and $2 million ($1 million after-tax or less than $0.01 per diluted share) in 2018 and 2017, respectively.
Praxair estimates that 2018 required contributions to its pension plans will be in the range of $20 million to $25 million, of which $17 million have been made through September 30, 2018.
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 September 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 $205 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$550 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$425 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.
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 nine months ended September 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 September 30,
Nine Months Ended September 30,
(Millions of dollars)
2018
2017
2018
2017
SALES(a)
North America
$
1,613
$
1,518
$
4,770
$
4,481
Europe
425
407
1,297
1,146
South America
329
389
1,043
1,131
Asia
487
451
1,465
1,268
Surface Technologies
170
157
509
458
Total sales
$
3,024
$
2,922
$
9,084
$
8,484
Quarter Ended September 30,
Nine Months Ended September 30,
(Millions of dollars)
2018
2017
2018
2017
OPERATING PROFIT
North America
$
420
$
386
$
1,258
$
1,121
Europe
81
79
248
220
South America
57
66
167
178
Asia
110
88
321
243
Surface Technologies
32
27
91
78
Segment operating profit
700
646
2,085
1,840
Transaction costs and other charges (Note 2)
(31
)
(14
)
(74
)
(35
)
Total operating profit
$
669
$
632
$
2,011
$
1,805
(a)
Sales reflect external sales only. Intersegment sales, primarily from North America to other segments, were not material.