The year ended December 31, 2012 includes the following items which are recorded as a separate line item in the consolidated financial statements:
Cost reduction program $ (56) $(16) $ (2) $(38)
Pension settlement charge (9) (3) — (6)
Income tax benefit — (55) — 55
Total $ (65) $(74) $ (2) $ 11
Cost Reduction Program
In the third quarter of 2012, Praxair recorded pre-tax charges totaling $56 million ($38 million after-tax and noncontrolling interest), relating to severance and business restructuring actions primarily in Europe within the industrial gases and surface technologies businesses. The cost reduction program was initiated primarily in response to the continuing economic downturn in Europe.
The following is a summary of the charges by reportable segment:
(Millions of dollars)
The costs associated with exit or disposal activities of $13 million include asset write-downs and other costs associated with a decision to eliminate and/or restructure operations and product lines. In Europe the costs primarily relate to the elimination and consolidation of operations in Spain. In Surface Technologies, the costs relate to the consolidation/rationalization of operations and product lines, primarily in Germany and Italy.
The following table summarizes the activities related to the company’s cost reduction program during 2012:
(Millions of dollars)
Less: Non-cash asset write-offs — (9) (9)
Foreign currency translation — — —
Balance, December 31, 2012 $ 30 $ 4 $ 34
Pension Settlement Charge
During 2011, a number of senior managers retired. These retirees are covered by the U.S. supplemental pension plan which provides for a lump sum benefit payment option. Under certain circumstances, such lump sum payments must be accounted for as a settlement of the related pension obligation, but only when paid. Accordingly, Praxair recorded a settlement charge related to net unrecognized actuarial losses of $9 million ($6 million after-tax) in July 2012 when cash payments were made (refer to Note 16).
Income Tax Benefit
In 2011 Praxair requested a pre-filing agreement (“PFA”) with the U.S. Internal Revenue Service (“IRS”) related to a loss on a liquidated subsidiary resulting from the divestiture of the U.S. Homecare Business. During the third quarter of 2012, the IRS approved the PFA resulting in a net income tax benefit of $55 million (refer to Note 5).
Classification in the consolidated financial statements
The $65 million of operating loss from the cost reduction program and pension settlement is shown as a separate line item on the consolidated statements of income. The $74 million tax benefit resulting from the pre-filing agreement, cost reduction program and pension settlement charge is reflected in income taxes. In the balance sheets, asset write-offs are recorded as a reduction to the carrying value of the related assets and unpaid amounts are recorded as short-term liabilities. As of December 31, 2012, there is a short-term liability of $34 million which is anticipated to be paid during 2013. On the consolidated statement of cash flows, the pre-tax loss from the cost reduction program, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 18, Praxair excluded these items in its management definition of segment operating profit;
a reconciliation of segments operating profit to consolidated operating profit is shown within the operating profit table.
2011 Gain on Acquisition and Cost Reduction Program – net
The year ended December 31, 2011 includes the following items which are recorded as a separate line item in the consolidated financial statements:
Cost reduction program (40) (9) — (31)
Total $ (1) $(6) $ (1) $ 6
Gain on Acquisition
As discussed in Note 3, during the fourth quarter 2011 Praxair increased its ownership in its Yara Praxair Holding AS (“Yara Praxair”) joint venture in Scandinavia from 50% to 66% and consolidated the company. Previously, Praxair accounted for its 50%
ownership interest in the joint venture as an equity method investment. In accordance with U. S. accounting rules, upon
interest. Accordingly, Praxair recorded a net pre-tax gain of $39 million ($37 million net income – Praxair, Inc.) during the fourth quarter of 2011 primarily for the amount that the fair value of its original 50% ownership interest exceeded the equity investment book value.
Cost Reduction Program
In the fourth quarter 2011, Praxair recorded pre-tax charges totaling $40 million ($31 million after-tax), relating to severance and business restructuring actions primarily in Europe within the industrial gases and surface technologies businesses. The cost reduction program was initiated primarily in response to the economic downturn in Europe.
The following is a summary of the charges by reportable segment.
(Millions of dollars)
Severance Costs
Costs Associated with Exit or Disposal Activities
Total Cost Reduction Program
North America $ 1 $— $ 1
Europe 20 1 21
South America 4 — 4
Surface Technologies 8 6 14
Total $33 $ 7 $40
The severance costs of $33 million are for the termination of approximately 290 employees, primarily in Europe, South America and Surface technologies, of which approximately half were terminated as of December 31, 2011. At December 31, 2012, all actions have been substantially completed. These costs include $6 million of pension settlement charges, primarily related to the closure of the surface technologies business in Switzerland.
The costs associated with exit or disposal activities of $7 million include asset write-downs and other costs primarily
associated with a decision to close the company’s surface technologies facility in Switzerland, and to consolidate operations in the United Kingdom.
Classification in the consolidated financial statements
The net $1 million of operating profit from the pre-tax gain, offset by the cost reduction program is shown as a separate line item on the consolidated statement of income and the tax benefit of $6 million is reflected in income taxes. In the balance sheets, asset write-offs are recorded as a reduction to the carrying value of the related assets and unpaid amounts are recorded as short-term liabilities (See Note 7). On the consolidated statement of cash flows, the pre-tax impact of the gain on acquisition and cost reduction program, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 18, Praxair excluded these items in its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the operating profit table.
2010 Spanish Income Tax Settlement and Other Charges – Net
The year ended December 31, 2010 includes the following items which are recorded in the consolidated financial statements:
(Millions of dollars) Operating Loss
Income Tax Provision (Benefit)
Net Income (Loss)
Spanish income tax settlement $— $250 $(250)
U.S. Homecare divestiture (58) (18) (40)
U.S. Homecare Divestiture
During the fourth quarter 2010, the company announced its intent to sell the U.S. homecare portion of its North American healthcare business and recorded a pre-tax charge of $58 million ($40 million after-tax) representing an adjustment to estimated fair value representing the company’s best estimate of the cash proceeds that would be realized upon eventual sale or other
disposition of the net assets of the business. There was no cash impact for 2010. On February 2, 2011, the company announced that it had entered into a definitive agreement for sale of the U.S. homecare business to Apria Healthcare Group Inc. The sale was finalized on March 4, 2011.
Repatriation Tax Benefit
Also during the fourth quarter 2010, the company recognized an income tax benefit of $35 million related to the repatriation of highly-taxed foreign earnings. There was no cash impact for 2010. See Note 5 for additional disclosures relating to foreign tax credit carryforwards and related valuation allowances.
Venezuela Currency Devaluation;
In January 2010, Venezuela announced a devaluation of the Venezuelan Bolivar and created a two tier exchange rate system.
Effective January 1, 2011, the two tier rate system was eliminated and a single exchange rate of 4.3 (implying 50% devaluation) is now required for all transactions, including Praxair’s operations. In the first quarter 2010, Praxair recorded a $27 million charge ($26 million after-tax) due primarily to the remeasurement of the local Venezuelan balance sheet to reflect the new official 4.3 exchange rate. The company does not expect the impact of the devaluation on future results of operations to be significant.
Classification in the consolidated financial statements
The pre-tax impact of $85 million is shown as a separate line item on the consolidated statements of income; the income tax impact of $196 million is reflected in income taxes. In the consolidated balance sheets, asset write-downs are recorded as a reduction to the carrying value of the related assets and unpaid amounts are recorded as short-term or long-term liabilities. In the consolidated statement of cash flows, the $481 million cash payment related to the Spanish income tax settlement is shown as follows: $250 million as a charge to net income – Praxair, Inc. and $231 million in a separate line item called Spanish income tax settlement. The pre-tax impact of the other matters is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 18, Praxair excluded these items in its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the operating profit table.
NOTE 3. ACQUISITIONS
The results of operations of these businesses have been included in Praxair’s consolidated statements of income since their respective dates of acquisition. Proforma financial statements for the following acquisitions have not been provided as the acquisitions are not material individually or in the aggregate.
2012 Acquisitions
In November 2012, Praxair acquired Acetylene Oxygen Company (“AOC”), one of the top ten independent gas and welding products distributors in the U.S, which operates throughout central and southern Texas. The acquisition of AOC allows Praxair to further expand its packaged gases presence in this region. Also, during the twelve months ended December 31, 2012, Praxair completed a number of other smaller acquisitions, primarily North American packaged gas distributors, including PortaGas, located in Houston, Texas. The aggregate purchase price for all acquisitions was $280 million, and resulted in recognition of $122 million of goodwill (see Note 9).
2011 Acquisitions
In December 2011, Praxair acquired Texas Welders Supply Company, the largest independent gas and welding products distributor in the greater Houston, Texas area. This acquisition increased Praxair’s packaged gas presence in what is considered one of top five welding markets in the U.S.
In October 2011, Praxair increased its ownership in its Yara Praxair industrial gases joint venture with Yara International ASA of Norway from 50% to 66%. The Yara Praxair joint venture, formed in late 2007, comprises Yara International’s former industrial gases businesses located in Norway, Denmark and Sweden. Through the third quarter 2011, Praxair accounted for its 50% ownership interest in the joint venture as an equity method investment. As a result of the acquisition of a controlling interest, Praxair consolidated Yara Praxair within the European segment beginning in the fourth quarter of 2011 (including $50 million of sales). In accordance with U.S. accounting rules, Praxair was also required to fair value its original 50% ownership interest in Yara
On June 15, 2011, Praxair completed the acquisition of a 49% ownership interest in the ROC Group’s industrial gases business operating in the United Arab Emirates (also see 2010 acquisitions below). This investment has been accounted for as an equity investment in Praxair’s consolidated financial statements.
Also, during the twelve months ended December 31, 2011, Praxair completed several smaller acquisitions, related primarily to North American packaged gas distributors, including American Gas Group, primarily located in Toledo, Ohio and National Alloy and Equipment, in Houston, Texas.
The aggregate net cash paid for these acquisitions was $294 million and resulted in the recognition of $396 million of
goodwill. The goodwill includes the consolidation of Yara Praxair, while the cash paid only relates to Praxair’s ownership increase.
2010 Acquisitions
In August 2010, Praxair acquired a 49% ownership interest in the ROC Group’s industrial gases businesses operating in Kuwait and Qatar. These investments are accounted for as equity investments in Praxair’s consolidated financial statements (also see 2011 acquisitions above). Additionally, during the twelve months ended December 31, 2010, Praxair completed several small acquisitions, related primarily to North American packaged gas distributors. The aggregate purchase price for the acquisitions was
$148 million, and resulted in recognition of $10 million of goodwill.
NOTE 4. LEASES
In the normal course of its business, Praxair enters into various leases as the lessee, primarily involving manufacturing and distribution equipment and office space. Total lease and rental expenses under operating leases were $120 million in 2012, $115 million in 2011 and $111 million in 2010. Capital leases are not significant and are included in property, plant and equipment – net.
Related obligations are included in debt.
At December 31, 2012, minimum payments due under operating leases are as follows:
(Millions of dollars)
2013 $111
2014 98
2015 84
2016 72
2017 56
Thereafter 62
$483 The present value of these future lease payments under operating leases is approximately $399 million.
Praxair’s leases where it is the lessor are not significant.