NOTE 2. VENEZUELA CURRENCY DEVALUATION AND OTHER CHARGES – NET
2013 Charges
Venezuela Currency Devaluation
On February 8, 2013, Venezuela announced a devaluation of the Venezuelan Bolivar from 4.30 to 6.30 (a 32% devaluation), effective on February 13, 2013. In the first quarter Praxair recorded a $23 million pre-tax charge ($23 million after-tax) due primarily to the remeasurement of the local Venezuelan balance sheet to reflect the new official 6.30 exchange rate. The company does not expect the impact of the devaluation on future results of operations to be significant.
Pension Settlement Charge
During 2012, 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 2013 when the cash payments were made to the retirees (refer to Note 16).
2012 Charges
Cost Reduction Program
In the third quarter of 2012, Praxair recorded pre-tax charges totaling $56 million ($38 million after taxes of $16 million and noncontrolling interests of $2 million), 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) | | Severance Costs | | Costs Associated with Exit or Disposal Activities | | Total Cost Reduction Program |
North America | | $ | 1 |
| | $ | — |
| | $ | 1 |
|
Europe | | 28 |
| | 8 |
| | 36 |
|
South America | | 1 |
| | — |
| | 1 |
|
Asia | | 2 |
| | — |
| | 2 |
|
Surface Technologies | | 11 |
| | 5 |
| | 16 |
|
Total | | $ | 43 |
| | $ | 13 |
| | $ | 56 |
|
The severance costs of $43 million are for the termination of approximately 410 employees, primarily in Europe (industrial gases and surface technologies). These actions reflected the continued business slow-down in Europe and resulted from a decision to eliminate and/or restructure operations and product lines. The actions are substantially completed as of December 31, 2013 and the remaining liability associated with those actions is expected to be paid during the next twelve months.
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 through December 31, 2013:
|
| | | | | | | | | | | | |
(Millions of dollars) | | Severance Costs | | Costs Associated with Exit or Disposal Activities | | Total Cost Reduction Program |
Cost reduction program charges in the third quarter of 2012 | | $ | 43 |
| | $ | 13 |
| | $ | 56 |
|
Less: Cash payments | | $ | (13 | ) | | $ | — |
| | $ | (13 | ) |
Less: Non-cash asset write-offs | | $ | — |
| | $ | (9 | ) | | $ | (9 | ) |
Balance, December 31, 2012 | | $ | 30 |
| | $ | 4 |
| | $ | 34 |
|
Less: Cash payments | | (16 | ) | | (4 | ) | | (20 | ) |
Foreign currency translation | | 1 |
| | — |
| | 1 |
|
Balance, December 31, 2013 | | $ | 15 |
| | $ | — |
| | $ | 15 |
|
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 the cash payments were made (refer to Note 16).
2011 Charges – net
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 consolidation Praxair was required to fair value the entire Yara Praxair joint venture, including its original 50% ownership 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 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 pre-tax net charges or benefits for each year are shown in operating profit in a separate line item on the consolidated statement of income. 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 net charges or benefits, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 18 - Segment Information, Praxair excluded these items in its management definition of segment operating profit; a reconciliation of segment operating profit to consolidated operating profit is shown within the operating profit table.
