Item 6. SELECTED FINANCIAL DATA

144K characters. Original on sec.gov · Markdown

Item 6. SELECTED FINANCIAL DATA

FIVE-YEAR FINANCIAL SUMMARY

(Dollar amounts in millions, except per share data)

The year ended December 31, 2018 reflects the results of Praxair for the entire year and the results of Linde AG for the period beginning after October 31, 2018 (the merger date), including the impacts of purchase accounting (See Notes 1, 3 and 4 to the consolidated financial statements). The historical periods prior to 2018 reflect the results of Praxair.

Year Ended December 31,2018(a)2017(a)2016(a)2015(a)2014(a)
From the Consolidated Statements of Income
Sales$14,900$11,437$10,534$10,776$12,273
Cost of sales, exclusive of depreciation and amortization9,0846,4615,8555,9186,933
Selling, general and administrative1,6291,2071,1451,1521,308
Depreciation and amortization1,8301,1841,1221,1061,170
Research and development11393929396
Transaction costs and other charges3095296165131
Net gain on sale of business3,294————
Other income (expenses) – net18423289
Operating profit5,2472,4442,2472,3702,644
Interest expense – net202161190161213
Net pension and OPEB cost (benefit), excluding service cost(4)(4)94936
Income from continuing operations before income taxes and equity investments5,0492,2872,0482,1602,395
Income taxes on continuing operations8171,026551612691
Income from continuing operations before equity investments4,2321,2611,4971,5481,704
Income from equity investments5647414342
Income from continuing operations (including noncontrolling interests)4,2881,3081,5381,5911,746
Noncontrolling interests from continuing operations(15)(61)(38)(44)(52)
Income from continuing operations$4,273$1,247$1,500$1,547$1,694
Per Share Data – Linde plc Shareholders
Basic earnings per share from continuing operations$12.93$4.36$5.25$5.39$5.79
Diluted earnings per share from continuing operations$12.79$4.32$5.21$5.35$5.73
Cash dividends per share$3.30$3.15$3.00$2.86$2.60
Weighted Average Shares Outstanding (000’s) (b)
Basic shares outstanding330,401286,261285,677287,005292,494
Diluted shares outstanding334,127289,114287,757289,055295,608
Other Information and Ratios
Total assets$93,386$20,436$19,332$18,319$19,769
Total debt$15,296$9,000$9,515$9,231$9,225
Net debt (c)$10,830$8,383$8,991$9,084$9,099
Cash flow from operations$3,654$3,041$2,789$2,695$2,923
Net cash provided by (used for) investing activities$5,363$(1,314)$(1,770)$(1,303)$(1,803)
Net cash used for financing activities$(4,998)$(1,656)$(659)$(1,310)$(1,063)
EBITDA (c)$7,133$3,675$3,410$3,519$3,856
Adjusted EBITDA (c)$4,516$3,727$3,506$3,684$3,987
Capital expenditures$1,883$1,311$1,465$1,541$1,689
Shares outstanding (000’s)547,242286,777284,901284,879289,262
Number of employees80,82026,46126,49826,65727,780
(a)Amounts for 2018 include: (i) charges of $309 million ($306 million after-tax, or $0.92 per diluted share) for transaction costs and other charges primarily related to the merger, (ii) pension settlement charges of $14 million ($11 million after-tax, or $0.03 per diluted share) related to lump sum benefit payments made from pension plans, (iii) income tax benefit, net of $17 million

($0.05 per diluted share) due to U.S. Tax Cuts and Jobs Act and other tax charges, (iv) a net gain on sale of businesses of $3,294 million ($2,923 million after-tax, or $8.75 per diluted share), (v) bond redemption costs of $26 million ($20 million after-tax, or $0.06 per diluted share), and (vi) the purchase accounting impacts of the merger of $714 million ($451 million after-tax and non-controlling interests, or $1.35 per diluted share).

Amounts for 2017 include: (i) charges of $52 million ($48 million after-tax, or $0.17 per diluted share) for transaction costs related to the merger, (ii) a pension settlement charge of $2 million ($1 million after-tax) related to lump sum benefit payments made from an international pension plan, and (iii) income tax charges, net of $394 million ($1.36 per diluted share) due to U.S. Tax Cuts and Jobs Act.

Amounts for 2016 include: (i) a $16 million charge to interest expense ($10 million after–tax, or $0.04 per diluted share) related to the redemption of the $325 million 5.20% notes due 2017, (ii) a pre–tax pension settlement charge of $4 million ($3 million after–tax, or $0.01 per diluted share) related to lump sum benefit payments made from the U.S. supplemental pension plan, and (iii) pre–tax charges of $96 million ($63 million after–tax and non–controlling interests, or $0.22 per diluted share) primarily related to cost reduction actions.

Amounts for 2015 include: (i) a pre-tax charge of $165 million ($125 million after-tax, or $0.43 per diluted share) related to the cost reduction program and other charges; and (ii) a pre-tax charge of $7 million ($5 million after-tax, or $0.02 per diluted share) related to a pension settlement.

Amounts for 2014 include: (i) a pre-tax charge of $131 million ($131 million after-tax, or $0.45 per diluted share) related to the Venezuela currency devaluation, (ii) a pre-tax charge of $7 million ($5 million after-tax, or $0.02 per diluted share) related to pension settlements; and (iii) a pre-tax charge of $36 million ($22 million after-tax, or $0.07 per diluted share) related to a bond redemption.

See Notes 1, 3, 4, 5, 7, 13 and 18 to the consolidated financial statements.

(b) As a result of the merger, share amounts for the year ended December 31, 2018 reflect the weighted averaging effect of Praxair shares outstanding prior to October 31, 2018 and Linde shares outstanding from October 31, 2018 through December 31, 2018.

(c)Non-GAAP measures. See the “Non-GAAP Financial Measures” section in Item 7 for definitions and reconciliation to reported amounts. Net debt, as presented in the table above, is calculated as total debt less cash and cash equivalents.
ITEM 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion of the company’s financial condition and results of operations should be read together with its consolidated financial statements and notes to the consolidated financial statements included in Item 8 of this Form 10-K.

Page
Merger of Praxair and Linde AG22
Business Overview23
Executive Summary – Financial Results & Outlook24
Consolidated Results and Other Information25
Segment Discussion35
Liquidity, Capital Resources and Other Financial Data46
Contractual Obligations49
Off-Balance Sheet Arrangements50
Critical Accounting Policies50
New Accounting Standards54
Fair Value Measurements54
Non-GAAP Financial Measures55

MERGER OF PRAXAIR, INC. AND LINDE AG

On October 31, 2018 Praxair and Linde AG combined their respective businesses through an all-stock transaction, and became subsidiaries of Linde (collectively referred to as the “business combination” or "merger"). Prior to the business combination, the company did not conduct any business activities other than those required for its formation and matters contemplated by the business combination agreement. Praxair was determined to be the accounting acquirer for the merger. Accordingly, the historical financial statements of Praxair for the periods prior to the merger are considered to be the historical financial statements of Linde. The results of Linde AG are included in Linde’s consolidated results from the merger date forward. The Linde shares trade on the New York Stock Exchange and the Frankfurt Stock Exchange under the ticker symbol “LIN”. See Notes 1 and 3 to the consolidated financial statements for additional information.

In connection with the business combination, the company, Praxair and Linde AG, entered into various agreements with regulatory authorities to satisfy anti-trust requirements to secure approval to consummate the business combination. These agreements required the sale of the majority of Praxair’s European businesses (completed on December 3, 2018), the majority of Linde AG’s America’s business (completed on March 1, 2019), as well as certain divestitures of other Praxair and Linde AG businesses in Asia that are expected to be sold in 2019 (collectively, the “merger-related divestitures”). In the consolidated financial statements, Praxair’s merger-related divestitures are included in the results of operations until sold and Linde AG’s merger-related divestitures are accounted for as discontinued operations. See Notes 4 and 23 to the consolidated financial statements for additional information relating to merger-related divestitures.

Additionally, to obtain merger approval in the United States Linde, Praxair and Linde AG entered into an agreement with the U.S. Federal Trade Commission dated October 1, 2018 (“hold separate order” or “HSO”). Under the HSO, the company, Praxair and Linde AG agreed to continue to operate Linde AG and Praxair as independent, ongoing, economically viable, competitive businesses held separate, distinct, and apart from each other’s operations; and not coordinate any aspect of their operations until certain divestitures in the United States were completed. Accordingly, Linde has accounted for Linde AG as a separate segment for 2018 reporting purposes effective with the merger date. Prior to the merger date, the company’s Linde AG segment did not exist. Since the FTC hold separate order restrictions were lifted effective March 1, 2019, the company subsequently implemented a new operating segment structure as follows: Americas; EMEA (Europe/Middle East/Africa); APAC (Asia/Pacific), Engineering and Other. This new management structure will be used for 2019 reporting and comparative prior period information will be presented on a consistent basis.

BUSINESS OVERVIEW

With the merger, Linde is the leading industrial gas company worldwide. The company's primary products in its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). The company also designs, engineers, and builds equipment that produces industrial gases primarily for internal use; and offers its customers a wide range of gas production and processing services such as olefin plants, natural gas plants, air separation plants, hydrogen and synthesis gas plants and other types of plants. The company’s surface technologies segment supplies wear-resistant and high-temperature corrosion-resistant metallic and ceramic coatings and powders.

Linde’s industrial gas operations are managed on a geographical basis and in 2018, 76% of sales were generated by Praxair's four geographic segments (North America, Europe, South America, and Asia), and since the merger date, the Linde AG segment generated 19% of consolidated sales. The surface technologies segment generated the remaining 5% of sales.

Linde serves a diverse group of industries including healthcare, petroleum refining, manufacturing, food, beverage carbonation, fiber-optics, steel making, aerospace, chemicals and water treatment. The diversity of end-markets supports financial stability for Linde in varied business cycles.

Linde generates most of its revenues and earnings in the following geographies where the company has its strongest market positions and where distribution and production operations allow the company to deliver the highest level of service to its customers at the lowest cost.

North and South America ("Americas")Europe, Middle East and Africa (“EMEA”)Asia and Pacific (“APAC”)
United StatesGermanyChina
CanadaUnited KingdomIndia
MexicoScandinaviaSouth Korea
BrazilRepublic of South Africa*Australia/New Zealand*
Taiwan

*Added with the Linde AG merger

The company manufactures and distributes its products through networks of thousands of production plants, pipeline complexes, distribution centers and delivery vehicles. Major pipeline complexes are primarily located in the United States. These networks are a competitive advantage, providing the foundation of reliable product supply to the company’s customer base. The majority of Linde’s business is conducted through long-term contracts which provide stability in cash flow and the ability to pass through changes in energy and feedstock costs to customers. The company has growth opportunities in all major geographies and in diverse end-markets such as energy, electronics, chemicals, metals, healthcare, food and beverage, and aerospace.

EXECUTIVE SUMMARY – FINANCIAL RESULTS & OUTLOOK

2018 Year in review

On October 31, 2018 Praxair and Linde AG combined their respective businesses through an all-stock merger transaction, and became subsidiaries of Linde plc. The year ended December 31, 2018 reflects the results of Praxair for the entire year and the results of Linde AG for the period beginning after October 31, 2018.

•Sales of $14,900 million were 30% above 2017 sales of $11,437 million, primarily driven by the merger with Linde AG that contributed 24% to sales, net of divestitures. Underlying sales increased 6% driven by volume growth primarily in North America and Asia, including new project start-ups, and higher price.
•Reported operating profit of $5,247 million was 115% above 2017. Adjusted operating profit of $2,976 million was 19% above adjusted operating profit in 2017. Adjusted operating profit growth was driven by higher volumes and price across the geographic segments and the impact of the merger.*
•Income from continuing operations of $4,273 million and diluted earnings per share from continuing operations of $12.79 increased from $1,247 million and $4.32, respectively in 2017. Adjusted income from continuing operations of $2,121 million and adjusted diluted earnings per share from continuing operations of $6.35 were 26% and 9%, respectively above 2017 adjusted amounts.*
•Cash flow from operations was $3,654 million, or 25% of sales. Capital expenditures were $1,883 million; dividends paid were $1,166 million; and debt repayments, net were $2,908 million.
•Cash on hand at December 31, 2018 was $4,466 million versus $617 million at December 31, 2017. This increase is primarily a result of the stock only merger with Linde AG and proceeds from the sale of Praxair's European industrial gases business. The cash is available for Corporate uses, including among others the planned squeeze-out of the 8% Linde AG noncontrolling interests and stock buybacks.
  • A reconciliation of the Adjusted amounts can be found in the "Non-GAAP Financial Measures" section in this MD&A. See Notes 1, 3, 4, 5, 7, 13 and 18 to the consolidated financial statements.

2019 Outlook

The company’s business is to build, own, and operate industrial gas plants in order to supply atmospheric and process gases to customers. As such, Linde believes that its sale of gas project backlog is one indicator of future sales growth. At December 31, 2018, Linde’s backlog of large projects under construction was $3.5 billion. This represents the total estimated capital cost of large plants under construction. APAC and Americas represent 49 percent and 42 percent of the backlog, respectively, with the remaining backlog in EMEA. These plants will primarily supply customers in the energy, chemical, and electronics end-markets.

The above guidance should be read in conjunction with the section entitled “Forward-Looking Statements.”

Linde provides quarterly updates on operating results, material trends that may affect financial performance, and financial guidance via earnings releases and investor teleconferences. These materials are available on the company’s website, https://www.linde.com/en/investors but are not incorporated herein.

CONSOLIDATED RESULTS AND OTHER INFORMATION

The year ended December 31, 2018 reflects the results of Praxair for the entire year and the results of Linde AG for the period beginning after October 31, 2018 (the merger date), including the impacts of purchase accounting (See Notes 1, 3 and 4 to the consolidated financial statements). The historical periods prior to 2018 reflect the results of Praxair, Inc.

The following table provides selected data for 2018, 2017, and 2016:

Variance
(Dollar amounts in millions, except per share data) Year Ended December 31,20182017 (d)2016 (d)2018 vs. 20172017 vs. 2016
Reported Amounts
Sales$14,900$11,437$10,53430%9%
Cost of sales, exclusive of depreciation and amortization$9,084$6,461$5,85541%10%
Gross margin (a)$5,816$4,976$4,67917%6%
As a percent of sales39.0%43.5%44.4%
Selling, general and administrative$1,629$1,207$1,14535%5%
As a percent of sales10.9%10.6%10.9%
Depreciation and amortization$1,830$1,184$1,12255%6%
Transaction costs and other charges (b)$309$52$96
Net gain on sale of businesses (b)$3,294$—$—
Other income (expense) – net$18$4$23
Operating Profit$5,247$2,444$2,247115%9%
Operating margin35.2%21.4%21.3%
Interest expense – net$202$161$19025%(15)%
Net pension and OPEB cost (benefit), excluding service cost$(4)$(4)$9—%(144)%
Effective tax rate16.2%44.9%26.9%
Income from equity investments$56$47$4119%15%
Noncontrolling interests from continuing operations$(15)$(61)$(38)(75)%61%
Income from continuing operations$4,273$1,247$1,500243%(17)%
Diluted earnings per share from continuing operations$12.79$4.32$5.21196%(17)%
Diluted shares outstanding (c)334,127289,114287,75716%—%
Number of employees80,82026,46126,498
Adjusted Amounts (e)
Operating profit$2,976$2,496$2,34319%7%
Operating margin20.0%21.8%22.2%
Interest expense – net$197$161$17422%(7)%
Net pension and OPEB cost (benefit), excluding service cost$(18)$(6)$5200%(220)%
Effective tax rate23.8%27.2%27.1%
Noncontrolling interests from continuing operations$(73)$(61)$(43)20%42%
Income from continuing operations$2,121$1,690$1,57626%7%
Diluted earnings per share from continuing operations$6.35$5.85$5.489%7%
Other Financial Data (e)
EBITDA$7,133$3,675$3,41094%8%
EBITDA Margin47.9%32.1%32.4%49%(1)%
Adjusted EBITDA$4,516$3,727$3,50621%6%
Adjusted EBITDA Margin30.3%32.6%33.3%(7)%(2)%
(a)Gross margin excludes depreciation and amortization expense.
(b)See Notes 5 and 4 to the consolidated financial statements.
(c)As a result of the merger, share amounts for the year ended December 31, 2018 reflect the weighted averaging effect of Praxair shares outstanding prior to October 31, 2018 and Linde shares outstanding from October 31, 2018 through December 31, 2018.
(d)Prior period information has been reclassified to conform with current year presentation as a result of the adoption of new accounting guidance on the presentation of net period pension and postretirement benefit costs. See Note 2 to the consolidated financial statements.
(e)Adjusted amounts and other financial data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the “Non-GAAP Financial Measures” section of this MD&A. See Notes 3, 4, 5, 13 and 18 to the consolidated financial statements.

Results of Operations

The following table provides a summary of changes in consolidated sales and adjusted operating profit:

2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume4%5%5%8%
Price/Mix2%9%1%5%
Cost pass-through1%—%2%—%
Currency(1)%—%1%1%
Acquisitions/Divestitures
Europe divestiture(1)%(1)%—%—%
Net gain on sale of businesses—%132%—%—%
Linde AG - excluding purchase accounting25%10%—%—%
Purchase accounting impacts - Linde AG—%(29)%—%—%
Other—%(11)%—%(5)%
Reported30%115%9%9%
Transaction costs and other charges—%7%—%(2)%
Net gain on sale of businesses—%(132)%—%—%
Purchase accounting impacts - Linde AG—%29%—%—%
Adjusted30%19%9%7%

The following tables provide consolidated sales by end-market and distribution method:

% of Sales*% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing22%22%23%7%4%
Metals17%17%17%7%7%
Energy11%12%12%6%5%
Chemicals11%10%10%14%9%
Electronics9%9%8%8%13%
Healthcare8%8%8%6%4%
Food & Beverage9%9%9%7%5%
Aerospace4%3%3%14%11%
Other9%10%10%(1)%3%
100%100%100%
  • Percentage of sales information excludes Linde AG. Percentage change information excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures, including the impact of the Linde AG merger. See Linde AG segment discussion.
% of Sales*
201820172016
Sales by Distribution Method
On-Site28%30%29%
Merchant31%34%35%
Packaged Gas30%27%28%
Other11%9%8%
100%100%100%
  • See Note 21 to the consolidated financial statements.

2018 Compared With 2017

Sales increased 30% to $14,900 million in 2018 compared to $11,437 million in 2017 primarily reflecting the merger with Linde AG which contributed 24% to sales, net of divestitures. Underlying sales increased 6% driven by higher volumes and pricing. Volume growth of 4% was driven by higher volumes in North America and Asia, including new project start-ups. Higher overall pricing across all geographic segments contributed 2% to sales. Currency translation impact decreased sales by 1%. Higher cost pass-through, primarily natural gas, increased sales by 1% with minimal impact on operating profit. The divestiture of Praxair's European businesses in December of 2018 decreased sales by 1%.

Gross margin increased $840 million, or 17%, versus 2017 primarily due to the merger. Gross margin as a percentage of sales declined to 39.0% in 2018 from 43.5% in 2017 and was negatively impacted by a $368 million charge for the fair value step-up of inventories acquired in the merger. Excluding this charge, gross margin in 2018 was 41.5%.

Selling, general and administrative ("SG&A") expenses increased $422 million, or 35%, in 2018 to $1,629 million primarily due to the merger. SG&A was 10.9% of sales in 2018 versus 10.6% in 2017, primarily due to the merger.

Depreciation and amortization expense increased $646 million, or 55%, versus 2017. The increase is primarily due to the merger, including $346 million of purchase accounting impacts related to the fair value of fixed assets and intangible assets acquired in the merger.

Transaction costs and other charges were $309 million and $52 million in 2018 and 2017, respectively and are primarily related to the merger. See Note 5 to the consolidated financial statements.

Net gain on the sale of businesses was $3,294 million and related primarily to the divestiture of Praxair's European industrial gases business in connection with the merger. See Note 4 to the consolidated financial statements.

Other income (expenses) – net in 2018 was a $18 million benefit versus a $4 million benefit in 2017 (see Note 9 to the consolidated financial statements for a summary of major components). In North America, 2018 included a $30 million asset impairment charge which was more than offset by $43 million of gains on asset disposals. In Asia, 2018 included a $22 million asset impairment charge, offset by a litigation settlement gain.

Reported operating profit of $5,247 million in 2018 was $2,803 million, or 115% higher than reported operating profit of $2,444 million in 2017. 2018 includes a net gain on sale of businesses of $3,294 million, partially offset by transaction costs and other charges of $309 million, and purchase accounting impacts of $714 million related to the Linde AG merger (see Notes 4, 5 and 3, respectively, to the consolidated financial statements). 2017 included transaction costs of $52 million (see Note 5 to the consolidated financial statements). Excluding the impact of these items, adjusted operating profit of $2,976 million in 2018 was $480 million, or 19%, higher than adjusted operating profit of $2,496 million in 2017 driven primarily by the merger. Higher volumes and price in the geographic segments and surface technologies also contributed to operating profit growth. A discussion of operating profit by segment is included in the segment discussion that follows.

Reported interest expense – net in 2018 increased $41 million, or 25%, versus 2017. 2018 included charges of $26 million relating to the early redemption of notes and a decrease of $21 million related to purchase accounting impacts related to the fair value of debt acquired in the merger (see Notes 13 and 3 to the consolidated financial statements, respectively). Excluding these impacts, adjusted interest expense of $197 million increased $36 million, or 22%, largely attributable to interest on the debt acquired in the merger and lower capitalized interest. See Note 9 to the consolidated financial statements for further information relating to interest expense.

The reported effective tax rate ("ETR") for 2018 was 16.2% versus 44.9% in 2017. The decrease in the ETR for the 2018 period versus the U.S. statutory rate of 21% was primarily due to the impact of the sale of Praxair's European industrial gases business. The increase in the ETR for the 2017 period versus the U.S. statutory rate of 35% was primarily due to the net $394 million charge related to the Tax Act. Excluding these and other smaller impacts as set forth in the "Non-GAAP financial measures" section of this MD&A, on an adjusted basis the ETR for the 2018 and 2017 periods was 23.8% and 27.2%, respectively. The decrease was driven primarily by the impact of the Tax Act enacted in the fourth quarter of 2017 which lowered the U.S. statutory tax rate from 35% in 2017 to 21% in 2018 (see Note 7 to the consolidated financial statements).

Linde’s equity investments are primarily located in the United States, China, and the Middle East. Equity income increased $9 million in 2018 versus 2017 and included charges of $9 million for purchase accounting impacts related to the fair value step up of equity investments acquired in the merger. Excluding this impact, equity income increased $18 million, primarily driven by income from equity investments acquired in the merger.

At December 31, 2018, reported noncontrolling interests from continuing operations consisted primarily of noncontrolling shareholders’ investments in Asia (primarily in China) and surface technologies. Reported noncontrolling interests from continuing operations decreased $46 million to $15 million in 2018 from $61 million in 2017. 2018 includes the impact of the merger and related purchase accounting impacts. Excluding these impacts, adjusted noncontrolling interests from continuing operations of $73 million increased $12 million, or 20%, primarily due to noncontrolling interests acquired in the merger.

Reported income from continuing operations for 2018 was $4,273 million, $3,026 million, or 243%, higher than reported income from continuing operations of $1,247 million in 2017. Adjusted income from continuing operations of $2,121 million in 2018 was $431 million, or 26%, higher than adjusted income from continuing operations of $1,690 million in 2017 primarily due to higher adjusted operating profit and a lower effective tax rate.

Reported diluted earnings per share from continuing operations ("EPS") of $12.79 in 2018 increased $8.47 per diluted share, or 196% from $4.32 in 2017. Adjusted diluted EPS of $6.35 in 2018 increased $0.50 per diluted share, or 9%, from adjusted diluted EPS of $5.85 in 2017. The increase in adjusted diluted EPS was primarily due to the merger and higher adjusted income from continuing operations, partially offset by an increase in diluted shares resulting from equity acquired in the merger.

Other comprehensive losses for the year ended December 31, 2018 of $299 million resulted primarily from (i) a $221 million unfavorable impact in the funded status of Linde's retirement obligations and (ii) adverse currency translation adjustments of $76 million, net of a benefit of $318 million related to the release of currency translation adjustments on Praxair's European business (See Note 4 to the consolidated financial statements). The decrease in the funded status of retirement obligations was primarily the result of higher current year actuarial losses, as the impact of higher U.S. discount rates was largely offset by a lower actual return on assets. Unfavorable translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements into U.S. dollars, and are largely driven by the strengthening of the U.S. dollar against major currencies including the Euro, Brazilian real and Canadian dollar.

Unfavorable currency translation adjustments included $343 million in South America and $149 million in Asia, partially offset by favorable currency translation adjustments of $231 million related to Linde AG (primarily Europe and Asia) representing translation impacts for the period from merger date through December 31, 2018. Remaining other comprehensive losses of $2 million relate to the amortization of deferred losses on the company's derivatives and unrealized losses on available for sale securities. Refer to the Currency section of the MD&A and Notes 9 and 18 to the consolidated financial statements.

The number of employees at December 31, 2018 was 80,820, an increase of 54,359 employees from December 31, 2017 primarily driven by an increase of approximately 56,000 related to the merger partially offset by a decrease of approximately 2,500 from the divestiture of Praxair's European industrial gases business.

Other Financial Data

Earnings before interest taxes depreciation and amortization ("EBITDA") increased $3,458 million to $7,133 million in 2018 from $3,675 million in 2017. EBITDA in 2018 includes a gain on sale of businesses and purchase accounting impacts, and both periods include transaction and other costs. Excluding the impacts of these items, adjusted EBITDA increased $789 million to $4,516 million in 2018 from $3,727 million in 2017 driven by the consolidation of Linde AG starting October 31, 2018, and higher adjusted income from continuing operations plus depreciation and amortization versus the prior year.

See the “Non-GAAP Financial Measures” section for definitions and reconciliation of these non-GAAP measures to reported amounts.

2017 Compared With 2016

Sales increased 9% to $11,437 million in 2017 compared to $10,534 million in 2016. Excluding favorable currency translation of 1% and higher cost pass-through, primarily natural gas, which increased sales by 2%, sales growth was 6%. Volume growth of 5% was driven by higher volumes in North America, Europe and Asia, including new project start-ups, and growth in all end-markets. Higher price increased sales by 1%.

Gross margin increased $297 million, or 6%, versus 2016 primarily due to higher sales. Gross margin as a percentage of sales declined to 43.5% in 2017 from 44.4% in 2016 largely driven by the contractual pass-through of higher natural gas costs to customers.

Selling, general and administrative expenses increased $62 million or 5% in 2017 to $1,207 million, and decreased to 10.6% of sales versus 10.9% of sales for 2016. Currency impacts increased SG&A by $14 million. Excluding currency impacts, SG&A increased $48 million driven by higher incentive compensation, acquisitions and cost inflation partially offset by cost reduction actions.

Depreciation and amortization expense increased $62 million versus 2016. Currency impacts increased depreciation and amortization expense by $15 million. Excluding currency impacts, depreciation and amortization expense increased $47 million, or 4%, primarily due to large project start ups and acquisitions.

During the year ended December 31, 2017, Linde recorded transaction costs and other charges of $52 million primarily related to the merger. During the year ended December 31, 2016, Linde recorded charges of $96 million related primarily to a cost reduction program. (Refer to Note 5 to the consolidated financial statements.)

Other income (expenses) – net in 2017 was a $4 million benefit versus a $23 million benefit in 2016 (see Note 9 to the consolidated financial statements for a summary of major components). Other income in 2016 is largely related to net gains on asset sales.

Reported operating profit of $2,444 million in 2017 was $197 million, or 9% higher than reported operating profit of $2,247 million in 2016. 2017 included transaction costs of $52 million. 2016 included charges of $96 million related to cost reduction actions. Refer to Note 5 of the consolidated financial statements for a further discussion of these items. Excluding the impact of these items, adjusted operating profit of $2,496 million in 2017 was $153 million, or 7% higher than adjusted operating profit of $2,343 million in 2016 driven by higher volumes and price. A discussion of operating profit by segment is included in the segment discussion that follows.

Reported interest expense – net in 2017 decreased $29 million, or 15%, versus 2016. 2016 included charges of $16 million relating to the early redemption of notes (see Note 13 to the consolidated financial statements). Excluding this

charge, adjusted interest expense decreased $13 million, or 7%, largely attributable to overall lower net debt. See Note 9 to the consolidated financial statements for further information relating to interest expense.

The reported effective tax rate for 2017 was 44.9% versus 26.9% in 2016. The ETR for the 2017 period included a net $394 million tax charge related to the Tax Act and a $5 million tax benefit related to transaction costs and a pension settlement (see Note 5 and Note 7 to the consolidated financial statements). The ETR for the 2016 period includes a $35 million tax benefit related to a pension settlement, bond redemption and cost reduction program and other charges (see Note 13 and Note 18 to the consolidated financial statements). Excluding these impacts, on an adjusted basis the ETR for the 2017 and 2016 periods was relatively flat at 27.2% and 27.1%, respectively.

Linde’s equity investments are primarily located in the United States, China, Italy, and the Middle East. Equity income increased $6 million in 2017.

At December 31, 2017, reported noncontrolling interests consisted primarily of noncontrolling shareholders’ investments in Asia (primarily in China), Europe (primarily in Italy), and surface technologies. Reported noncontrolling interests increased $23 million to $61 million in 2017 from $38 million in 2016. Reported noncontrolling interests for the year ended December 31, 2016 included a reduction of $5 million related to a cost reduction program. The remaining increase was driven by PG Technologies, LLC ("PGT"), a surface technologies joint venture with GE Aviation formed in the fourth quarter of 2016 (see Note 16 to the consolidated financial statements).

Reported income from continuing operations in 2017 was $1,247 million, or $253 million lower than $1,500 million in 2016. Adjusted income from continuing operations of $1,690 million in 2017 was $114 million, or 7% higher than $1,576 million in 2016. Adjusted income from continuing operations increased primarily due to higher adjusted operating profit and lower adjusted interest expense - net.

Reported diluted earnings per share from continuing operations of $4.32 in 2017 decreased $0.89 per diluted share, or 17% from $5.21 in 2016. The decrease included a $1.36 net income tax charge related to the Tax Act and a $0.17 charge related to transaction costs and other charges (see Note 7 and Note 5 to the consolidated financial statements). Adjusted diluted EPS from continuing operations of $5.85 in 2017 increased $0.37 per diluted share, or 7%, from adjusted diluted EPS from continuing operations of $5.48 in 2016. The increase in adjusted diluted EPS was primarily due to higher adjusted income from continuing operations.

Other comprehensive income for the year ended December 31, 2017 of $536 million includes favorable currency translation adjustments of $525 million and an $11 million favorable impact in the funded status of retirement obligations. The favorable translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements into U.S. dollars, and are largely driven by the weakening of the U.S. dollar against the Canadian dollar, Euro, and Korean won. Favorable currency translation adjustments included $232 million in Asia, $153 million in North America and $106 million in Europe partially offset by unfavorable currency translation adjustments of $35 million in South America. The increase in the funded status of retirement obligations was primarily the result of lower current year actuarial losses, as the impact of lower U.S. discount rates was largely offset by a higher actual return on assets. Refer to the Currency section of the MD&A and Notes 9 and 18 to the consolidated financial statements.

The number of employees at December 31, 2017 was 26,461, a decrease of 37 employees from December 31, 2016. This decrease primarily reflects the impact of cost reduction programs implemented during the previous year.

Other Financial Data

EBITDA increased $265 million to $3,675 million in 2017 from $3,410 million in 2016. Adjusted EBITDA increased $221 million to $3,727 million in 2017 from $3,506 million in 2016 driven by higher adjusted income from continuing operations plus depreciation and amortization versus the prior year.

See the “Non-GAAP Financial Measures” section for definitions and reconciliation of these non-GAAP measures to reported amounts.

Related Party Transactions

The company’s related parties are primarily unconsolidated equity affiliates. The company did not engage in any material transactions involving related parties that included terms or other aspects that differ from those which would be negotiated with independent parties.

Environmental Matters

Linde’s principal operations relate to the production and distribution of atmospheric and other industrial gases, which historically have not had a significant impact on the environment. However, worldwide costs relating to environmental protection may continue to grow due to increasingly stringent laws and regulations, and Linde's ongoing commitment to rigorous internal standards. In addition, Linde may face physical risks from climate change and extreme weather.

Climate Change

Linde operates in jurisdictions that have, or are developing, laws and/or regulations to reduce or mitigate the perceived adverse effects of greenhouse gas ("GHG") emissions and faces a highly uncertain regulatory environment in this area. For example, the U.S. Environmental Protection Agency ("EPA") has promulgated rules requiring reporting of GHG emissions, and Linde and many of its suppliers and customers are subject to these rules. EPA has also promulgated regulations to restrict GHG emissions, including final rules regulating GHG emissions from light-duty vehicles and certain large manufacturing facilities, many of which are Linde suppliers or customers. In addition to these developments in the United States, GHGs are regulated in the European Union under the Emissions Trading System, which has wide implications for the company's customers and may impact certain operations of Linde in Europe. There are also requirements for mandatory reporting in Canada, which apply to certain Linde operations and will be used in developing cap-and-trade regulations on GHG emissions. These regulations are expected to impact certain Linde facilities in Canada. Climate change and energy efficiency laws and policies are also being widely introduced in jurisdictions throughout South America, Mexico and parts of Asia. China has announced plans to launch a national carbon emissions trading system, though it does not appear the regulations will have a direct impact on GHG emissions from Linde facilities. Among other impacts, such regulations are expected to raise the costs of energy, which is a significant cost for Linde. Nevertheless, Linde's long-term customer contracts routinely provide rights to recover increased electricity, natural gas, and other costs that are incurred by the company as a result of Climate Change regulation.

Linde anticipates continued growth in its hydrogen business, as hydrogen is essential to refineries that use it to remove sulfur from transportation fuels in order to meet ambient air quality standards in the United States and fuel standards in other regions. Hydrogen production plants and a large number of other manufacturing and electricity-generating plants have been identified in California and the European Union as a source of carbon dioxide emissions and these plants are subject to cap-and-trade regulations in those jurisdictions. Linde believes it will be able to mitigate the costs of these regulations through the terms of its product supply contracts. However, legislation that limits GHG emissions may impact growth by increasing capital, compliance, operating and maintenance costs and/or decreasing demand.

To manage business risks from current and potential GHG emission regulation as well as physical consequences of climate change, Linde actively monitors current developments, evaluates the direct and indirect business risks, and takes appropriate actions. Among others, actions include: increasing relevant resources and training; maintaining contingency plans; obtaining advice and counsel from expert vendors, insurance providers and industry experts; incorporating GHG provisions in commercial agreements; and conducting regular reviews of the business risks with management. Although there are considerable uncertainties, Linde believes that the business risk from potential regulations can be effectively managed through its commercial contracts. Additionally, Linde does not anticipate any material effects regarding its plant operations or business arising from potential physical risks of climate change.

Linde continuously seeks opportunities to optimize its own energy use and GHG footprint through rigorous energy efficiency, investment in renewable energy, and purchasing hydrogen as a chemical byproduct where feasible. Linde maintains related performance improvement targets and reports progress against these targets regularly to business management and annually to Linde's Board of Directors.

At the same time, Linde may benefit from business opportunities arising from governmental regulation of GHG and other emissions; uncertain costs of energy and certain natural resources; the development of renewable energy alternatives; and new technologies that help extract natural gas, improve air quality, increase energy efficiency and mitigate the impacts of climate change. Linde continues to develop new applications that can lower emissions, including GHG emissions, in

Linde's processes and help customers lower energy consumption and increase product throughput. Stricter regulation of water quality in emerging economies such as China provide a growing market for a number of gases, e.g., oxygen for wastewater treatment. Increased concern about drought in areas such as California may create a market for carbon dioxide for desalination. Renewable fuel standards in the European Union and U.S. create a market for second-generation biofuels which use industrial gases such as oxygen, carbon dioxide, and hydrogen.

Costs Relating to the Protection of the Environment

Environmental protection costs in 2018 were not significant. Linde anticipates that future annual environmental protection expenditures will be similar to 2018, subject to any significant changes in existing laws and regulations. Based on historical results and current estimates, management does not believe that environmental expenditures will have a material adverse effect on the consolidated financial position, the consolidated results of operations or cash flows in any given year.

Legal Proceedings

See Note 19 to the consolidated financial statements for information concerning legal proceedings.

Retirement Benefits

Pensions

The net periodic benefit cost for the U.S. and International pension plans was $24 million in 2018, $58 million in 2017 and $51 million in 2016. The net periodic pension cost for 2018 includes a benefit of $44 million related to gains on settlements triggered as part of the Praxair European business divestiture and recognized on the Net gain on sale of businesses line. This also includes settlement charges related to lump sum payments (e.g., triggered by change in control or normal retirements) of $14 million in 2018. Settlement charges for 2017 and 2016 were $2 million and $4 million, respectively.

The funded status (pension benefit obligation ("PBO") less the fair value of plan assets) for the U.S. plans was a deficit of $556 million as of December 31, 2018 versus a deficit of $560 million at December 31, 2017. Actuarial gains on favorable liability experience that arose during the current year related primarily to higher discount rates and were largely offset by a lower return on assets. The funded status (pension benefit obligation ("PBO") less the fair value of plan assets) for international plans was a deficit of $1,241 million as of December 31, 2018 versus a deficit of $158 million at December 31, 2017. The deficit is primarily due to the Linde AG merger. Linde' AG's major international pension arrangements are in the United Kingdom and Germany.

Global pension contributions were $87 million in 2018, $19 million in 2017 and $11 million in 2016. At a minimum, Linde contributes to its pension plans to comply with local regulatory requirements (e.g., ERISA in the United States). Discretionary contributions in excess of the local minimum requirements are made based on many factors, including long-term projections of the plans' funded status, the economic environment, potential risk of overfunding, pension insurance costs and alternative uses of cash. Changes to these factors can impact the timing of discretionary contributions from year to year. Estimated required contributions for 2019 are currently expected to be in the range of $95 million to $160 million.

Linde assumes expected returns on plan assets for 2019 of 7.50% and 5.00% for the U.S. and international plans, respectively, which are consistent with the long-term expected return on its investment portfolio.

Excluding the impact of any settlements, 2019 consolidated pension expense is expected to be $6 million.

Postretirement Benefits Other Than Pensions ("OPEB")

The net periodic benefit cost for OPEB plans was a $4 million cost in 2018, a $13 million benefit in 2017 and a $5 million cost in 2016. 2017 includes a curtailment gain on a South American OPEB plan of $18 million.

In 2019, consolidated net periodic benefit costs for the OPEB plans is expected to be approximately $5 million.

Refer to the Critical Accounting Policies section and Note 18 to the consolidated financial statements for a more detailed discussion of the company’s retirement benefits, including a description of the various retirement plans and the assumptions used in the calculation of net periodic benefit cost and funded status.

Insurance

Linde purchases insurance to limit a variety of property and casualty risks, including those related to property, business interruption, third-party liability and workers’ compensation. Currently, the company self-retains up to $5 million per occurrence for workers’ compensation, general and vehicle liability in the United States and retains up to $5 million per

occurrence at its various properties worldwide. To mitigate its aggregate loss potential above these retentions, the company purchases insurance coverage from highly rated insurance companies. The company does not currently operate or participate in any captive insurance companies or other non-traditional risk transfer alternatives.

At December 31, 2018 and 2017, the company had recorded a total of $60 million and $35 million, respectively, representing an estimate of the retained liability for the ultimate cost of claims incurred and unpaid as of the balance sheet dates. The estimated liability is established using statistical analysis and is based upon historical experience, actuarial assumptions and professional judgment. These estimates are subject to the effects of trends in loss severity and frequency and are subject to a significant degree of inherent variability. If actual claims differ from the company’s estimates, they will be adjusted at that time and financial results could be impacted.

Linde recognizes estimated insurance proceeds relating to damages at the time of loss only to the extent of incurred losses. Any insurance recoveries for business interruption and for property damages in excess of the net book value of the property are recognized only when realized or pending payments confirmed by its insurance companies.

SEGMENT DISCUSSION

Through October 31, 2018 the company’s operations were organized into five reportable segments, four of which have been determined on a geographic basis of segmentation: North America, Europe, South America and Asia. The company’s surface technologies business represents the fifth reportable segment. These segments are comprised of Praxair businesses for all years presented. As discussed above in the section "Business Overview - Merger of Praxair, Inc. and Linde AG" Linde AG became a separate sixth reportable segment effective with the merger on October 31, 2018 and, accordingly, Linde AG’s operations were included in the consolidated financial statements effective from the merger date (see Notes 1 and 3 to the consolidated financial statements for additional information).

The following summary of sales and operating profit by segment provides a basis for the discussion that follows (for additional information concerning Linde’s segments, see Note 20 to the consolidated financial statements). Linde evaluates the performance of its reportable segments based on operating profit, excluding the items not indicative of ongoing business trends.

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales
North America$6,420$6,023$5,5927%8%
Europe1,5921,5581,3922%12%
South America1,3691,5011,399(9)%7%
Asia1,9641,7381,55513%12%
Surface Technologies68261759611%4%
Linde AG2,873——
$14,900$11,437$10,53430%9%
Operating Profit
North America$1,648$1,517$1,4319%6%
Europe3163012745%10%
South America215239263(10)%(9)%
Asia42733327628%21%
Surface Technologies1181069911%7%
Linde AG252——
Segment operating profit2,9762,4962,34319%7%
Transaction costs and other charges(309)(52)(96)
Net gain on sale of businesses3,294——
Purchase accounting impacts - Linde AG(714)——
Consolidated operating profit$5,247$2,444$2,247

North America

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales$6,420$6,023$5,5927%8%
Cost of sales, exclusive of depreciation and amortization3,3953,1672,871
Gross margin3,0252,8562,721
Operating expenses717708676
Depreciation and amortization660631614
Operating profit$1,648$1,517$1,4319%6%
Operating margin25.7%25.2%25.6%
2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume4%6%4%8%
Price/Mix2%—8%2%5%
Cost pass-through1%—%2%—%
Currency—%—%—%—%
Acquisitions/Divestitures—%—%—%—%
Other—%(5)%—%(7)%
7%9%8%6%

The following tables provide sales by end-market and distribution method:

% of Sales% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing29%29%29%8%4%
Metals11%12%12%5%7%
Energy17%18%17%(1)%7%
Chemicals11%9%9%25%5%
Electronics5%5%5%3%17%
Healthcare7%7%7%7%5%
Food & Beverage10%10%10%8%5%
Aerospace2%2%2%21%14%
Other8%8%9%(2)%1%
100%100%100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
% of Sales
201820172016
Sales by Distribution Method
On-Site30%30%28%
Merchant37%37%38%
Packaged Gas31%31%31%
Other2%2%3%
100%100%100%

The North America segment includes Linde’s industrial gases operations in the United States, Canada and Mexico.

Sales for 2018 increased $397 million, or 7%, versus 2017. Higher cost pass-through, primarily higher natural gas prices passed through to hydrogen customers, increased sales by 1% with minimal impact on operating profit. Excluding cost pass–through, sales increased 6% primarily due to higher volumes to most end-markets and higher pricing.

Operating profit in 2018 increased $131 million, or 9% from 2017 driven by higher volumes and pricing. Operating profit for 2018 also included a $30 million asset impairment charge which was more than offset by $43 million of gains on asset disposals.

Sales for 2017 increased $431 million, or 8%, versus 2016. Higher cost pass-through, primarily higher natural gas prices passed through to hydrogen customers, increased sales by 2% with minimal impact on operating profit. Excluding cost pass–through, sales increased 6% primarily due to higher volumes to all end-markets and higher pricing.

Operating profit in 2017 increased $86 million, or 6% from 2016 driven by higher volumes and pricing which were partially offset by hurricane impacts and higher costs, primarily energy and purchased products.

Europe

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales$1,592$1,558$1,3922%12%
Cost of sales, exclusive of depreciation and amortization940889774
Gross margin652669618
Operating expenses190199189
Depreciation and amortization146169155
Operating profit$316$301$2745%10%
Operating margin19.8%19.3%19.7%
2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume1%1%5%8%
Price/Mix2%9%1%3%
Cost pass-through2%—%1%—%
Currency4%5%2%2%
Acquisitions/Divestitures(7)%(7)%3%2%
Other—%(3)%—%(5)%
2%5%12%10%

The following tables provide sales by end-market and distribution method:

% of Sales% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing20%20%21%5%4%
Metals17%16%16%8%9%
Energy4%5%5%(4)%1%
Chemicals12%12%14%6%7%
Electronics7%7%7%2%7%
Healthcare12%12%11%6%4%
Food & Beverage15%14%12%11%8%
Aerospace1%1%1%(12)%3%
Other12%13%13%(1)%8%
100%100%100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
% of Sales
201820172016
Sales by Distribution Method
On-Site18%18%19%
Merchant34%35%35%
Packaged Gas43%42%42%
Other5%5%4%
100%100%100%

Linde’s European industrial gases business operated in Spain, Ireland, Italy, France, Germany, Russia, the United Kingdom, Scandinavia and the Benelux region. In connection with the merger, Praxair was required to sell the majority of its European industrial gases business. The sale was completed on December 3, 2018 and the European business results are included in the consolidated financial statements through the date of sale. See Note 4 to the consolidated financial statements.

Sales in 2018 increased $34 million, or 2% from 2017. The divestiture of the European businesses decreased sales by 7%. Excluding the divestiture impact, sales increased 9% from 2017. Higher cost pass-through increased sales by 2% with minimal impact on operating profit. Favorable currency translation increased sales by 4%. Higher volumes and higher price increased sales by 1% and 2%, respectively.

Operating profit in 2018 of $316 million increased $15 million, or 5% from 2017. The divestiture of the European businesses decreased operating profit by 7%. Currency translation impact increased operating profit by 5%. Excluding the divestiture and currency impacts, operating profit increased 7% driven by higher price and higher volumes, partially offset by cost inflation.

Sales in 2017 increased $166 million, or 12% from 2016. Higher cost pass-through increased sales by 1% with minimal impact on operating profit. Favorable currency translation increased sales by 2%. Higher overall volumes, including new project start-ups, and higher price increased sales by 5% and 1%, respectively. The acquisition of a carbon dioxide business in the prior year largely serving the food and beverage end-market increased sales by 3%.

Operating profit in 2017 of $301 million increased $27 million, or 10% from 2016 driven by higher volumes and higher price. Favorable currency translation and the acquisition of the carbon dioxide business in the prior year each contributed 2% to operating profit growth.

South America

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales$1,369$1,501$1,399(9)%7%
Cost of sales, exclusive of depreciation and amortization819905822
Gross margin550596577
Operating expenses187198181
Depreciation and amortization148159133
Operating profit$215$239$263(10)%(9)%
Operating margin15.7%15.9%18.8%
2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume1%(5)%—%(2)%
Price/Mix2%12%1%3%
Cost pass-through—%—%—%—%
Currency(12)%(18)%6%4%
Acquisitions/Divestitures—%—%—%—%
Other—%1%—%(14)%
(9)%(10)%7%(9)%

The following tables provide sales by end-market and distribution method:

% of Sales% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing15%17%18%(5)%(2)%
Metals32%31%31%4%1%
Energy2%2%2%1%23%
Chemicals10%10%9%7%8%
Electronics—%—%—%—%—%
Healthcare19%19%19%2%3%
Food & Beverage14%13%13%3%2%
Aerospace—%—%—%—%—%
Other8%8%8%11%(7)%
100%100%100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
% of Sales
201820172016
Sales by Distribution Method
On-Site33%33%31%
Merchant38%38%40%
Packaged Gas27%27%27%
Other2%2%2%
100%100%100%

The South America segment includes Linde's industrial gases operations in Brazil, Argentina, Bolivia, Chile, Colombia, Paraguay, Peru, and Uruguay.

Sales in 2018 decreased $132 million, or 9%, versus 2017. Unfavorable currency impacts decreased sales by 12% driven by the weakening of the Brazilian real and Argentine peso against the U.S. dollar. Excluding currency, sales increased 3% driven by higher price and volumes.

Operating profit decreased $24 million or 10% versus 2017. Excluding unfavorable currency impacts, operating profit increased 8% driven by higher price and lower costs partially offset by unfavorable sales mix.

Effective July 1, 2018 Argentina was deemed a highly inflationary economy (see Note 5 to the consolidated financial statements).

Sales in 2017 increased $102 million, or 7%, versus 2016. Favorable currency translation impacts increased sales by 6% primarily due to the strengthening of the Brazilian Real against the U.S. dollar. Excluding currency, sales increased 1% driven by higher price. Volumes were flat as new project contribution was offset by negative underlying base volumes in Brazil due to weak industrial production. Growth in on-site volumes due to new plant start-ups accounted for the increase in on-site sales as a percentage of total segment sales.

Operating profit decreased $24 million or 9% versus 2016. Excluding currency translation, operating profit decreased 13% driven by unfavorable product sales mix and cost inflation which were partially offset by higher price.

Asia

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales$1,964$1,738$1,55513%12%
Cost of sales, exclusive of depreciation and amortization1,2151,098998
Gross margin749640557
Operating expenses118122102
Depreciation and amortization204185179
Operating profit$427$333$27628%21%
Operating margin21.7%19.2%17.7%
2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume9%14%11%19%
Price/Mix2%14%1%8%
Cost pass-through1%—%1%—%
Currency1%1%1%1%
Acquisitions / Divestitures—%—%(2)%—%
Other—%(1)%—%(7)%
13%28%12%21%

The following tables provide sales by end-market and distribution method:

% of Sales% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing9%9%9%16%13%
Metals26%27%28%12%15%
Energy5%3%3%104%14%
Chemicals14%15%14%3%20%
Electronics34%33%33%13%12%
Healthcare1%1%1%10%(1)%
Food & Beverage2%2%2%(6)%(1)%
Aerospace—%—%—%—%—%
Other9%10%10%(6)%10%
100%100%100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
% of Sales
201820172016
Sales by Distribution Method
On-Site50%50%50%
Merchant32%30%29%
Packaged Gas11%13%14%
Other7%7%7%
100%100%100%

The Asia segment includes Linde’s industrial gases operations in China, India, Korea and Thailand, with smaller operations in Taiwan and the Middle East.

Sales in 2018 increased $226 million, or 13% versus 2017. Cost pass-through, primarily energy, and currency impacts each increased sales by 1%. Volume growth of 9% was primarily attributable to base volume growth in China, Korea and India and new project start-ups in China. Higher price increased sales by 2% driven by China. Sales growth was the strongest in the metals, energy and electronics end-markets.

Operating profit for 2018 increased $94 million, or 28%, as compared to the prior year driven by higher volumes and price. Operating profit for 2018 included a $22 million asset impairment charge, offset by a litigation settlement gain.

Sales in 2017 increased $183 million, or 12% versus 2016. Favorable currency translation and cost pass-through each increased sales by 1%. Divestitures decreased sales by 2% due to the sale of an ownership interest in a majority-owned joint venture in India in 2016. Excluding these impacts, sales increased 12% driven by base volume growth in China, Korea and India, new project start-ups in China and Korea and higher price.

Operating profit for 2017 increased $57 million, or 21%, as compared to the prior year driven by higher volumes and price, partially offset by cost inflation.

Surface Technologies

(Dollar amounts in millions) Year Ended December 31,Variance
2018201720162018 vs. 20172017 vs. 2016
Sales$682$617$59611%4%
Cost of sales, exclusive of depreciation and amortization448402391
Gross margin234215205
Operating expenses726966
Depreciation and amortization444040
Operating profit$118$106$9911%7%
Operating margin17.3%17.2%16.6%
2018 vs. 20172017 vs. 2016
% Change% Change
SalesOperating ProfitSalesOperating Profit
Factors Contributing to Changes
Volume/Price8%19%2%4%
Cost pass-through1%—%—%—%
Currency2%2%—%—%
Acquisitions/Divestitures—%—%2%1%
Other—%(10)%—%2%
11%11%4%7%

The following table provides sales by end-market:

% of Sales% Change*
2018201720162018 vs. 20172017 vs. 2016
Sales by End-Markets
Manufacturing12%11%11%22%2%
Metals8%9%9%(4)%—%
Energy18%19%23%4%(12)%
Chemicals2%2%2%(4)%(7)%
Electronics1%1%1%33%32%
Healthcare—%—%—%—%—%
Food & Beverage3%3%4%(3)%(4)%
Aerospace45%44%40%12%11%
Other11%11%10%5%2%
100%100%100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.

Surface Technologies provides high-performance coatings and thermal-spray powders and equipment in the Americas, Europe, and Asia.

Sales increased $65 million, or 11% versus 2017 primarily due to higher volumes to the aerospace and manufacturing end-markets and higher price. Currency translation increased sales by 2%.

Operating profit increased $12 million, or 11% versus 2017. Currency translation increased operating profit by 2%. Excluding currency impacts, operating profit increased 9% driven by increased volumes and price partially offset by project ramp up costs.

Sales increased $21 million, or 4% versus 2016 primarily due to higher volumes to the aerospace end-market and acquisitions driven by a majority-owned joint venture with GE aviation.

Operating profit increased $7 million, or 7% versus 2016 due to higher volumes and acquisitions.

Linde AG

(Dollar amounts in millions) Year Ended December 31,
2018
Sales$2,873
Cost of sales, exclusive of depreciation and amortization1,899
Gross margin974
Operating expenses440
Depreciation and amortization282
Operating profit$252
Operating margin8.8%

The following tables provide sales by end-market and distribution method:

% of Sales
2018
Sales by End-Markets
Manufacturing19%
Metals9%
Chemicals & Energy13%
Electronics7%
Healthcare23%
Food & Beverage6%
Engineering18%
Other5%
100%
  • Excludes impact of currency, natural gas/precious metals cost pass-through and acquisitions/divestitures.
% of Sales
2018
Sales by Distribution Method
On-Site17%
Merchant18%
Packaged Gas44%
Other21%
100%

Linde AG became a sixth reportable segment effective with the merger on October 31, 2018. Sales of $2,873 million and operating profit of $252 million represent results for the two month period from merger date through December 31, 2018.

Currency

The results of Linde’s non-U.S. operations are translated to the company’s reporting currency, the U.S. dollar, from the functional currencies used in the countries in which the company operates. For most foreign operations, Linde uses the local currency as its functional currency. There is inherent variability and unpredictability in the relationship of these functional currencies to the U.S. dollar and such currency movements may materially impact Linde’s results of operations in any given period.

To help understand the reported results, the following is a summary of the significant currencies underlying Linde’s consolidated results and the exchange rates used to translate the financial statements (rates of exchange expressed in units of local currency per U.S. dollar):

Percent of 2018 Consolidated SalesStatements of IncomeBalance Sheets
Average Year Ended December 31,December 31,
Currency20182017201620182017
Euro16%0.850.890.900.870.83
Brazilian real7%3.633.193.473.873.31
Chinese yuan7%6.606.766.646.886.51
Canadian dollar6%1.301.301.321.361.26
Mexican peso4%19.2018.8618.6519.6519.66
Korean won3%1,1001,1311,1601,1111,067
British pound3%0.750.780.740.780.74
Indian rupee3%6865677064
Australia dollars1%1.34——1.42—
Taiwan dollars1%30.1330.4332.2530.5529.73
Norwegian krone<1%8.138.268.398.648.20
Argentina peso (a)<1%26.1916.5114.7437.7018.65

(a) Effective July 1, 2018 Argentina was deemed a highly inflationary economy (see Note 5 to the consolidated financial statements).

LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA

(Millions of dollars) Year Ended December 31,201820172016
Net Cash Provided by (Used for)
Operating Activities
Income from continuing operations (including noncontrolling interests)$4,288$1,308$1,538
Non-cash charges (credits):
Add: Transaction costs and other charges, net of payments (a)402683
Add: Amortization of merger-related inventory step-up368——
Less: Net gain on sale of businesses (b)(2,923)——
Add: Tax Act income tax charge, net(61)394—
Add: Depreciation and amortization1,8301,1841,122
Add (Less): Deferred income taxes, excluding Tax Act(187)136(13)
Add (Less): non-cash charges and other237102(4)
Income from continuing operations adjusted for non-cash charges and other3,5923,1502,726
Less: Pension contributions(87)(19)(11)
Add (Less): Working capital202(158)52
Add (Less): Other(53)6822
Net cash provided by operating activities$3,654$3,041$2,789
Investing Activities
Capital expenditures$(1,883)$(1,311)$(1,465)
Acquisitions, net of cash acquired(25)(33)(363)
Divestitures and asset sales, net of cash divested5,9083058
Cash acquired in merger transaction1,363——
Net cash provided by (used for) investing activities$5,363$(1,314)$(1,770)
Financing Activities
Debt increases (decreases) – net$(2,908)$(771)$357
Issuances (purchases) of ordinary shares – net(522)108(89)
Cash dividends – Linde plc shareholders(1,166)(901)(856)
Noncontrolling interest transactions and other(402)(92)(71)
Net cash (used) for financing$(4,998)$(1,656)$(659)
Effect of exchange rate changes on cash$(60)$22$17
Cash and cash equivalents, end-of-period$4,466$617$524
(a)See Note 5 to the consolidated financial statements.
(b)See Note 4 to the consolidated financial statements.

Cash increased $3,849 million in 2018 versus 2017. The primary sources of cash in 2018 were cash flows from operations of $3,654 million, proceeds from divestitures and asset sales of $5,908 million and cash acquired in the merger of $1,363 million. The primary uses of cash included capital expenditures of $1,883 million, cash dividends to shareholders of $1,166 million, net debt repayments of $2,908 million and net purchases of ordinary shares of $522 million.

Cash Flows From Operations

chart-5b306afbfc535acfa75.jpg

2018 compared with 2017

Cash flows from operations was $3,654 million, or 25% of sales, an increase of $613 million from $3,041 million, or 27% of sales in 2017. The increase was primarily attributable to the merger, higher net income adjusted for non-cash charges and favorable working capital requirements, partially offset by unfavorable changes in other long–term assets and liabilities and higher pension contributions.

2017 compared with 2016

Cash flows from operations was $3,041 million, or 27% of sales, an increase of $252 million from $2,789 million, or 26% of sales in 2016. The increase was primarily attributable to higher net income adjusted for non-cash charges, a $103 million increase in dividends received from equity companies, primarily in China, and favorable changes in other long–term assets and liabilities which were partially offset by higher working capital requirements and pension contributions.

Investing

chart-fb759303a8545c22b1c.jpg

2018 compared with 2017

Net cash used provided by investing activities of $5,363 million increased $6,677 million from 2017 primarily driven by proceeds from the divestiture of Praxair's European business and cash acquired in the merger, partially offset by higher capital expenditures.

Capital expenditures in 2018 were $1,883 million, an increase of $572 million from 2017, driven primarily by the merger with Linde AG. Capital expenditures during 2018 related primarily to investments in new plant and production equipment for growth and density. Approximately 50% of the capital expenditures were in North America with the rest in Asia, Europe, South America and Linde AG.

Acquisition expenditures in 2018 were $25 million, a decrease of $8 million from 2017. Additionally, $1,363 million of cash was acquired in the merger (see Note 3 to the consolidated financial statements).

Divestitures and asset sales in 2018 totaled $5,908 million primarily driven by proceeds from merger-related divestitures including $5,562 million from the sale of Praxair's European business and $214 million related to the sale of Praxair's Italian joint venture (see Note 4 to the consolidated financial statements).

2017 compared with 2016

Net cash used for investing activities of $1,314 million decreased $456 million versus 2016 due to lower acquisitions and capital expenditures, partially offset by lower proceeds from divestiture and asset sales.

Capital expenditures in 2017 were $1,311 million, a decrease of $154 million from 2016. Capital expenditures during 2017 related primarily to investments in new plant and production equipment for growth and density. Approximately 60% of the capital expenditures were in North America with the rest in Asia, Europe and South America.

Acquisition expenditures in 2017 were $33 million, a decrease of $330 million from 2016. Acquisitions in the prior year were primarily comprised of the acquisition of a European carbon dioxide business and packaged gases businesses in North America and Europe (see Note 3 to the consolidated financial statements).

Divestitures and asset sales in 2017 totaled $30 million of proceeds from asset sales. 2016 divestitures and asset sales were $58 million which included proceeds from asset sales and the sale of an ownership interest in a majority-owned joint venture in India.

Financing

Linde’s financing strategy is to secure long-term committed funding by issuing public notes and debentures and commercial paper backed by a long-term bank credit agreement. Linde’s international operations are funded through a combination of local borrowing and inter-company funding to minimize the total cost of funds and to manage and centralize currency exchange exposures. As deemed necessary, Linde manages its exposure to interest-rate changes through the use of financial derivatives (see Note 14 to the consolidated financial statements and Item 7A. Quantitative and Qualitative Disclosures About Market Risk).

Cash used by financing activities was $4,998 million in 2018 compared to $1,656 million in 2017. The primary financing uses of cash were for net debt repayments, cash dividends and net purchases of Linde ordinary shares. Cash dividends of $1,166 million increased $265 million from 2017 driven primarily by higher shares outstanding after the merger and a 5% increase in dividends per share from $3.15 to $3.30. Net purchases of ordinary shares were $522 million in 2018 versus net issuances of ordinary shares of $108 million in 2017 driven by increased share repurchases. Noncontrolling interest transactions and other payments was $402 million in 2018 versus $92 million in 2017. Amounts paid in 2018 include $315 million for the purchase of the noncontrolling interest in Praxair's Italian joint venture in a merger-related transaction (see Note 4 to the consolidated financial statements) and $25 million in interest related to the early redemption of bonds (see Note 13 to the consolidated financial statements); while 2017 include dividends paid to NCI joint venture partners and repayment of project advances. The cash used for debt repayments-net of $2,908 million increased $2,137 million from $771 million during 2017 while cash increased $3,849 million. Net debt (debt minus cash) increased $2,447 million primarily due to debt acquired in the merger partially offset by the repayments of debt and increased cash.

The company believes that it has sufficient operating flexibility, cash reserves, and funding sources to maintain adequate amounts of liquidity to meet its business needs around the world. In March 2019, Linde's credit ratings as reported by Standard & Poor’s and Moody’s were A-1 and P-1 for short-term debt, respectively, and A and A2 for long-term debt, respectively.

Note 13 to the consolidated financial statements includes information with respect to the company’s debt repayments in 2018, current debt position, debt covenants and the available credit facilities; and Note 14 includes information relating to derivative financial instruments. Linde's credit facilities are with major financial institutions and are non-cancelable until maturity. Therefore, the company believes the risk of the financial institutions being unable to make required loans under the credit facilities, if requested, to be low. Linde’s major bank credit and long-term debt agreements contain standard covenants. The company was in compliance with these covenants at December 31, 2018 and expects to remain in compliance for the foreseeable future.

Linde’s total net debt outstanding at December 31, 2018 was $10,830 million, $2,447 million higher than $8,383 million at December 31, 2017. The December 31, 2018 net debt balance includes $14,258 million in public securities, $1,038 million representing primarily worldwide bank borrowings net of $4,466 million of cash. Linde’s global effective borrowing rate was approximately 1.96% for 2018.

In March 2018, Linde repaid $500 million of 1.20% notes that became due and in November 2018, Linde repaid $475 million of 1.25% notes that became due.

Additionally, in December 2018, Linde repaid $600 million of 4.50% notes due 2019 and €600 million of 1.50% notes due 2020 resulting in a $26 million interest charge ($20 million after-tax, or $0.06 per diluted share) (see Note 13 to the consolidated financial statements).

Also in December 2018, Linde repaid €750 million of 3.125% notes that became due.

In February 2019, Linde repaid $500 million of 1.90% notes that became due.

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

On December 10, 2018 the company announced a $1.0 billion share repurchase program, of which $629 million had been repurchased through December 31, 2018. This program was completed in February of 2019. On January 22, 2019, the company’s board of directors approved the additional repurchase of $6.0 billion of its ordinary shares with a stated expiration date of February 1, 2021. For additional information related to the share repurchase programs, see Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

CONTRACTUAL OBLIGATIONS

The following table sets forth Linde’s material contract obligations and other commercial commitments as of December 31, 2018:

(Millions of dollars)Due or expiring by December 31,
20192020202120222023ThereafterTotal
Long-term debt obligations:
Debt and capitalized lease maturities (Note 13)$1,523$1,642$1,864$2,336$1,788$4,658$13,811
Contractual interest3152832321691416211,761
Operating leases (Note 6)3052361861451023261,300
Retirement obligations24529303131180546
Unconditional purchase obligations8427677216755833,2676,855
Construction commitments2,1009022494——3,255
Total Contractual Obligations$5,330$3,859$3,282$3,360$2,645$9,052$27,528

Contractual interest on long-term debt of $1,761 million represents interest the company is contracted to pay on outstanding long-term debt, current portion of long-term debt and capital lease obligations, calculated on a basis consistent with planned debt maturities, excluding the interest impact of interest rate swaps. At December 31, 2018, Linde had fixed-rate debt of $12,565 million and floating-rate debt of $2,731 million. The rate assumed for floating-rate debt was the rate in effect at December 31, 2018.

Retirement obligations of $546 million include estimates of pension plan contributions and expected future benefit payments for unfunded pension and OPEB plans. Pension plan contributions are forecasted for 2019 only. For purposes of the table, $125 million of estimated required contributions have been included for 2019. Expected future unfunded pension and OPEB benefit payments are forecasted only through 2028. Contribution and unfunded benefit payment estimates are based upon current valuation assumptions. Estimates of pension contributions after 2019 and unfunded benefit payments after 2028 are not included in the table because the timing of their resolution cannot be estimated. Retirement obligations are more fully described in Note 18 to the consolidated financial statements.

Unconditional purchase obligations of $6,855 million represent contractual commitments under various long and short-term take-or-pay arrangements with suppliers and are not included on Linde's balance sheet. These obligations are primarily minimum-purchase commitments for helium, electricity, natural gas and feedstock used to produce atmospheric and process gases. A significant portion of these obligations is passed on to customers through similar take-or-pay or other contractual arrangements. Purchase obligations that are not passed along to customers through such contractual arrangements are subject to market conditions, but do not represent a material risk to Linde. Approximately $2,224 million of the purchase obligations relates to power and is intended to secure the uninterrupted supply of electricity and feedstock to Linde's plants to reliably satisfy customer product supply obligations, and extend through 2030. Certain of the power contracts contain various cancellation provisions requiring supplier agreement, and many are subject to annual escalations based on local inflation factors.

Construction commitments of $3,255 million represent outstanding commitments to complete authorized construction projects as of December 31, 2018. A significant portion of Linde’s capital spending is related to the construction of new production facilities to satisfy customer commitments which may take a year or more to complete.

Liabilities for uncertain tax positions totaling $367 million, including interest and penalties, and tax liabilities for deemed repatriation of earnings of $291 million are not included in the table because the timing of their resolution cannot be estimated. See Note 7 to the consolidated financial statements for disclosures surrounding uncertain income tax positions.

OFF-BALANCE SHEET ARRANGEMENTS

As discussed in Note 19 to the consolidated financial statements, at December 31, 2018, Linde had undrawn outstanding letters of credit, bank guarantees and surety bonds entered into in connection with normal business operations and they are not reasonably likely to have a material impact on Linde’s consolidated financial condition, results of operations, or liquidity.

CRITICAL ACCOUNTING POLICIES

The policies discussed below are considered by management to be critical to understanding Linde’s financial statements and accompanying notes prepared in accordance with accounting principles generally accepted in the United States ("U.S. GAAP"). Their application places significant importance on management’s judgment as a result of the need to make estimates of matters that are inherently uncertain. Linde’s financial position, results of operations and cash flows

could be materially affected if actual results differ from estimates made. These policies are determined by management and have been reviewed by Linde’s Audit Committee.

Purchase Accounting

As discussed below, Linde AG’s assets and liabilities were measured at fair value as of the date of the merger on a preliminary basis. Estimates of fair value represent management's best estimate of assumptions about future events and uncertainties. In determining the fair value, Linde utilized various forms of the income, cost and market approaches depending on the asset or liability being fair valued. The estimation of fair value includes significant judgments related to future cash flows (sales, costs, customer attrition rates, and contributory asset charges), discount rates, competitive trends, market comparables and others. Inputs were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates. The estimates and assumptions used to determine the preliminary estimated fair value assigned to each class of assets and liabilities, as well as asset lives, have a material impact to the company's consolidated financial statements, and are based upon assumptions believed to be reasonable but that are inherently uncertain.

Due to the timing of the business combination, the magnitude of and multi-national nature of the net assets acquired, and the hold separate order (See Note 1 to the consolidated financial statements) which deferred integration of the two merged companies, at December 31, 2018 the valuation process to determine the fair values is not complete and further adjustments are expected in 2019. The company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available. The areas where the fair value assessments are not finalized and, therefore, subject to adjustment during the measurement period relate primarily to identifiable intangible assets, property, plant and equipment, net assets held for sale, equity investments, income taxes, noncontrolling interests, contingencies and goodwill. As the company finalizes the fair value of net assets acquired and liabilities assumed, additional purchase price allocation adjustments will be recorded during the measurement period, but no later than one year from the date of the acquisition. The company will reflect measurement period adjustments in the period in which the adjustments are determined. Any adjustments to the fair value of assets and liabilities acquired will be offset to goodwill and any income statement impacts will be recorded at that time.

See Note 3 to the consolidated financial statements for additional information.

Depreciation and Amortization

Depreciable Lives of Property, Plant and Equipment

Linde’s net property, plant and equipment at December 31, 2018 was $29,717 million, representing 32% of the company’s consolidated total assets and including $19,491 million of Linde AG assets acquired at fair value in the merger. Depreciation expense for the year ended December 31, 2018 was $1,615 million, or 13% of total operating costs. This includes $225 million of purchase accounting impacts. Management judgment is required in the determination of the estimated depreciable lives that are used to calculate the annual depreciation expense and accumulated depreciation.

Property, plant and equipment are recorded at cost and depreciated over the assets’ estimated useful lives on a straight-line basis for financial reporting purposes. The estimated useful life represents the projected period of time that the asset will be productively employed by the company and is determined by management based on many factors, including historical experience with similar assets, technological life cycles, geographic locations and contractual supply relationships with on-site customers. Circumstances and events relating to these assets, such as on-site contract modifications, are monitored to ensure that changes in asset lives or impairments (see “Asset Impairments”) are identified and prospective depreciation expense or impairment expense is adjusted accordingly. Linde’s largest asset values relate to cryogenic air-separation production plants with depreciable lives of principally 15 years.

Based upon the assets as of December 31, 2018, if depreciable lives of machinery and equipment, on average, were increased or decreased by one year, annualized depreciation expense, including Linde AG for a full year on a pro forma basis, would be decreased by approximately $528 million or increased by approximately $390 million, respectively.

See Notes 3, 9 and 10 to the consolidated financial statements for additional information.

Amortization of Other Intangible Assets

Linde’s net other intangible assets at December 31, 2018 was $16,223 million, representing 17% of the company’s consolidated total assets and including $15,636 million of Linde AG other intangible assets acquired at fair value in the merger ($13,967 million with finite lives and $1,669 million with indefinite lives). Amortization expense related to finite-lived intangible assets for the year ended December 31, 2018 was $215 million, or 2% of total operating costs. This

includes $121 million of purchase accounting impacts. Management judgment is required in the determination of the estimated amortizable lives that are used to calculate the annual amortization expense and accumulated amortization. See Note 12 to the consolidated financial statements.

Based upon the assets as of December 31, 2018, if amortization lives of other intangible assets, on average, were increased or decreased by one year, annualized amortization expense, including Linde AG for a full year on a pro forma basis, would be decreased by approximately $65 million or increased by approximately $49 million, respectively.

See Notes 3, 9, and 12 to the consolidated financial statements for additional information.

Revenue Recognition

Long Term Construction Contracts

The company designs and manufactures equipment for air separation and other varied gas production and processing plants manufactured specifically for end customers. Revenue from sale of equipment is generally recognized over time as Linde has an enforceable right to payment for performance completed to date and performance does not create an asset with alternative use. For contracts recognized over time, revenue is recognized primarily using a cost incurred input method. Costs incurred to date relative to total estimated costs at completion are used to measure progress toward satisfying performance obligations. Costs incurred include material, labor, and overhead costs and represent work contributing and proportionate to the transfer of control to the customer. Contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change. We assess performance as progress towards completion is achieved on specific projects, earnings will be impacted by changes to our forecast of revenues and costs on these projects.

Pension Benefits

Pension benefits represent financial obligations that will be ultimately settled in the future with employees who meet eligibility requirements. Because of the uncertainties involved in estimating the timing and amount of future payments, significant estimates are required to calculate pension expense and liabilities related to the company’s plans. The company utilizes the services of independent actuaries, whose models are used to facilitate these calculations.

Several key assumptions are used in actuarial models to calculate pension expense and liability amounts recorded in the financial statements. Management believes the three most significant variables in the models are the expected long-term rate of return on plan assets, the discount rate, and the expected rate of compensation increase. The actuarial models also use assumptions for various other factors, including employee turnover, retirement age, and mortality. Linde management believes the assumptions used in the actuarial calculations are reasonable, reflect the company’s experience and expectations for the future and are within accepted practices in each of the respective geographic locations in which it operates. Actual results in any given year will often differ from actuarial assumptions because of economic and other factors. The sensitivities to each of the key assumptions presented below exclude the impact of special items that occurred during the year (e.g., settlement gains from divestitures, settlement charges resulting from change in control provisions, etc.).

The weighted-average expected long-term rates of return on pension plan assets were 7.62% for U.S. plans and 5.13% for international plans for the year ended December 31, 2018 (8.00% and 7.91%, respectively at December 31, 2017). The expected long term rate of return on the U.S. and international plan assets is estimated based on the plans' investment strategy and asset allocation, historical capital market performance and, to a lesser extent, historical plan performance. A 0.50% change in these expected long-term rates of return, with all other variables held constant, would change Linde’s pension expense by approximately $38 million.

The company has consistently used a market-related value of assets rather than the fair value at the measurement date to determine annual pension expense. The market-related value recognizes investment gains or losses over a five-year period. As a result, changes in the fair value of assets from year to year are not immediately reflected in the company’s annual pension expense. Instead, annual pension expense in future periods will be impacted as deferred investment gains or losses are recognized in the market-related value of assets over the five-year period. The consolidated market-related value of assets was $8,530 million, or $286 million higher than the fair value of assets of $8,244 million at December 31, 2018. These net deferred investment gains of $286 million will be recognized in the calculation of the market-related value of assets ratably over the next four years and will impact future pension expense. Future actual investment gains or losses will impact the market-related value of assets and, therefore, will impact future annual pension expense in a similar manner.

Discount rates are used to calculate the present value of plan liabilities and pension costs and are determined annually by management. For fiscal year 2016, Praxair changed the approach that it used to determine the service and interest cost components of pension and OPEB expense for significant plans to the spot rate approach. Linde AG also adopted the spot

rate approach for its material U.S. and international pension plans as of the merger date. Under this approach U.S. plans that do not use the spot rate approach continue to determine discount rates by using a cash flow matching model provided by the company's independent actuaries. The model includes a portfolio of corporate bonds graded Aa or better by at least half of the ratings agencies and matches the U.S. plans' projected cash flows to the calculated spot rates. Discount rates for the remaining international plans are based on market yields for high-quality fixed income investments representing the approximate duration of the pension liabilities on the measurement date. Refer to Note 18 to the consolidated financial statements for a summary of the discount rates used to calculate plan liabilities and benefit costs, and to the Retirement Benefits section of the Consolidated Results and Other Information section of this MD&A for a further discussion of 2018 benefit costs. A 0.50% change in discount rates, with all other variables held constant, would decrease/increase Linde’s pension expense by approximately $24 million. A 0.50% reduction in discount rates would increase the PBO by approximately $806 million whereas a 0.50% increase in discount rates would have a favorable impact to the PBO of approximately $710 million.

The weighted-average expected rate of compensation increase was 3.25% for U.S. plans and 2.38% for international plans at December 31, 2018 (3.25% and 3.35%, respectively, at December 31, 2017). The estimated annual compensation increase is determined by management every year and is based on historical trends and market indices. A 0.50% change in the expected rate of compensation increase, with all other variables held constant, would change Linde’s pension expense by approximately $8 million and would impact the PBO by approximately $60 million.

Asset Impairments

Goodwill and Other Indefinite-Lived Intangibles Assets

At December 31, 2018, the company had goodwill of $26,874 million, of which $24,320 million was recorded in connection with the Linde AG merger, and $1,669 million of other indefinite-lived intangible assets acquired in the merger. Goodwill represents the aggregate of the excess consideration paid for acquired businesses over the fair value of the net assets acquired. Indefinite-lived other intangibles relate to the Linde name.

The company performs a goodwill impairment test annually in the second quarter or more frequently if events or circumstances indicate that an impairment loss may have been incurred, and no impairments were indicated. The company has continuously re-evaluated the likelihood of goodwill impairments in its reporting units subsequent to the second quarter test, and does not believe there is indication of impairment for any of its reporting units. At December 31, 2018, Linde’s enterprise value was approximately $96 billion (outstanding shares multiplied by the year-end stock price plus debt, and without any control premium) while its total capital was approximately $68 billion.

The impairment test allows an entity to first assess qualitative factors to determine if it is more likely than not that the fair value of a reporting unit is less than carrying value. If it is determined that it is more likely than not that the fair value of a reporting unit is less than carrying value then the company will estimate and compare the fair value of its reporting units to their carrying value, including goodwill. Reporting units are determined based on one level below the operating segment level. Fair value is determined through the use of projected future cash flows, multiples of earnings and sales and other factors.

Such analysis requires the use of certain market assumptions and discount factors, which are subjective in nature. As applicable, estimated values can be affected by many factors beyond the company's control such as business and economic trends, government regulation, and technological changes. Management believes that the qualitative factors used to perform its annual goodwill impairment assessment are appropriate and reasonable. Although the 2018 qualitative assessment indicated that it is more likely than not that the fair value of each reporting unit substantially exceeded its carrying value, changes in circumstances or conditions affecting this analysis could have a significant impact on the fair value determination, which could then result in a material impairment charge to the company's results of operations.

Other indefinite-lived intangible assets are evaluated for impairment on an annual basis or more frequently if events and circumstances indicate that an impairment loss may have been incurred, and no impairments were indicated.

See Notes 3, 11 and 12 to the consolidated financial statements.

Long-Lived Assets

Long-lived assets, including Property, plant and equipment and finite-lived other intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an individual asset or asset group may not be recoverable. For purposes of this test, asset groups are determined based upon the lowest level for which

there are independent and identifiable cash flows. Based upon Linde's business model, for property, plant and equipment an asset group may be a single plant and related assets used to support on-site, merchant and packaged gas customers. Alternatively, the asset group may be a pipeline complex which includes multiple interdependent plants and related assets connected by pipelines within a geographic area used to support the same distribution methods.

Income Taxes

At December 31, 2018, Linde had deferred tax assets of $2,039 million (net of valuation allowances of $237 million), and deferred tax liabilities of $8,961 million. At December 31, 2018, uncertain tax positions totaled $319 million (see Notes 2 and 7 to the consolidated financial statements). Income tax expense was $817 million for the year ended December 31, 2018, or about 16.2% of pre-tax income (see Note 7 to the consolidated financial statements for additional information related to taxes).

In the preparation of consolidated financial statements, Linde estimates income taxes based on diverse legislative and regulatory structures that exist in various jurisdictions where the company conducts business. Deferred income tax assets and liabilities represent tax benefits or obligations that arise from temporary differences due to differing treatment of certain items for accounting and income tax purposes. Linde evaluates deferred tax assets each period to ensure that estimated future taxable income will be sufficient in character (e.g. capital gain versus ordinary income treatment), amount and timing to result in their recovery. A valuation allowance is established when management determines that it is more likely than not that a deferred tax asset will not be realized to reduce the assets to their realizable value. Considerable judgments are required in establishing deferred tax valuation allowances and in assessing exposures related to tax matters. As events and circumstances change, related reserves and valuation allowances are adjusted to income at that time. Linde’s tax returns are subject to audit and local taxing authorities could challenge the company’s tax positions. The company’s practice is to review tax filing positions by jurisdiction and to record provisions for uncertain income tax positions, including interest and penalties when applicable. Linde believes it records and/or discloses such potential tax liabilities as appropriate and has reasonably estimated its income tax liabilities and recoverable tax assets. If new information becomes available, adjustments are charged or credited against income at that time. Management does not anticipate that such adjustments 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 material impact on the company’s reported results of operations.

In 2018, Linde completed its accounting and updated its provisional estimate related to the deemed repatriation of foreign earnings under the 2017 Tax Act in accordance with Staff Accounting Bulletin Number 118 resulting in a net reduction to income tax expense of $61 million (see Note 7 to the consolidated financial statements). A provision is made for taxes on undistributed earnings of foreign subsidiaries and related companies to the extent that such earnings are not deemed to be permanently reinvested.

Contingencies

The company accrues liabilities for non-income tax contingencies when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized. If new information becomes available or losses are sustained in excess of recorded amounts, adjustments are charged against income at that time. 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 material impact on the company’s reported results of operations.

Linde is subject to various claims, legal proceedings 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 (see Note 19 to the consolidated financial statements). Such contingencies are significant and the accounting requires considerable management judgments in analyzing each matter to assess the likely outcome and the need for establishing appropriate liabilities and providing adequate disclosures. Linde believes it records and/or discloses such contingencies as appropriate and has reasonably estimated its liabilities.

NEW ACCOUNTING STANDARDS

See Note 2 to the consolidated financial statements for information concerning new accounting standards and the impact of the implementation of these standards on the company’s financial statements.

FAIR VALUE MEASUREMENTS

Linde does not expect changes in the aggregate fair value of its financial assets and liabilities to have a material impact on the consolidated financial statements. See Note 15 to the consolidated financial statements.

NON-GAAP FINANCIAL MEASURES

The following non-GAAP measures are intended to supplement investors’ understanding of the company’s financial information by providing measures which investors, financial analysts and management use to help evaluate the company’s financial leverage and operating performance. Special items which the company does not believe to be indicative of on-going business performance are excluded from these calculations so that investors can better evaluate and analyze historical and future business trends on a consistent basis. Definitions of these non-GAAP measures may not be comparable to similar definitions used by other companies and are not a substitute for similar GAAP measures.

The non-GAAP measures in the following reconciliations are presented in the Selected Financial Data (Item 6) or this MD&A.

Adjusted Amounts

Certain amounts for 2018, 2017, 2016, 2015 and 2014 have been included for reference purposes and to facilitate the calculations contained herein.

(Dollar amounts in millions, except per share data)20182017201620152014
Year Ended December 31,
Adjusted Operating Profit and Margin
Reported operating profit$5,247$2,444$2,247$2,370$2,644
Less: Net gain on sale of businesses(3,294)——
Add: Transaction costs and other charges30952———
Add: Purchase accounting impacts - Linde AG714————
Add: Venezuela currency devaluation————131
Add: Cost reduction program——96165—
Total adjustments(2,271)5296165131
Adjusted operating profit$2,976$2,496$2,343$2,535$2,775
Reported percent change115%9%(5)%(10)%(2)%
Adjusted percent change19%7%(8)%(9)%2%
Reported sales$14,900$11,437$10,534$10,776$12,273
Reported operating margin35.2%21.4%21.3%22.0%21.5%
Adjusted operating margin20.0%21.8%22.2%23.5%22.6%
Adjusted Net pension and OPEB cost (benefit), excluding service cost
Reported net pension and OPEB cost (benefit), excluding service cost$(4)$(4)$94936
Less: Pension settlement charge(14)(2)(4)(7)(7)
Adjusted net pension and OPEB cost (benefit), excluding service cost$(18)$(6)$5$42$29
Adjusted Interest Expense - Net
Reported interest expense202161190161213
Less: Bond redemption(26)—(16)—(36)
Add: Purchase accounting impacts - Linde AG21————
Adjusted interest expense - net$197$161$174$161$177
(Dollar amounts in millions, except per share data)20182017201620152014
Year Ended December 31,
Adjusted Income Taxes and Effective Tax Rate
Reported income taxes$817$1,026$551$612$691
Add: Bond redemption6—6—14
Add: Pension settlement charge31122
Add: Cost reduction program——2839—
Less: Tax Act61(394)———
Add: Transaction costs and other charges34———
Less: Net gain on sale of businesses(371)————
Add: Other tax charge(44)————
Add: Purchase accounting impacts - Linde AG191————
Total adjustments(151)(389)354116
Adjusted income taxes$666$637$586$653$707
Reported income before income taxes and equity investments$5,049$2,287$2,048$2,160$2,395
Add: Bond redemption26—16—36
Add: Pension settlement charge142477
Add: Venezuela currency devaluation————131
Add: Cost reduction program——96165—
Add: Transaction costs and other charges30952———
Less: Net gain on sale of businesses(3,294)————
Add: Purchase accounting impacts - Linde AG693————
Total adjustments(2,252)54116172174
Adjusted income before income taxes and equity investments$2,797$2,341$2,164$2,332$2,569
Reported effective tax rate16.2%44.9%26.9%28.3%28.9%
Adjusted effective tax rate23.8%27.2%27.1%28.0%27.5%
Adjusted Noncontrolling Interests from Continuing Operations
Reported noncontrolling interests from continuing operations$(15)$(61)$(38)$(44)$(52)
Add: Purchase accounting impacts - Linde AG(59)————
Less: Cost reduction program1—(5)(1)—
Total adjustments(58)—(5)(1)—
Adjusted noncontrolling interests from continuing operations$(73)$(61)$(43)$(45)$(52)
Adjusted Income from Continuing Operations
Reported income from continuing operations$4,273$1,247$1,500$1,547$1,694
Add: Bond redemption20—10—22
Add: Pension settlement charge111355
Add: Venezuela currency devaluation————131
Add: Cost reduction program1—63125—
Less: Net gain on sale of businesses(2,923)————
Add: Other tax charges44————
Add: Tax Act(61)394———
Add: Transaction costs and other charges30548———
Add: Purchase accounting impacts - Linde AG451————
Total adjustments(2,152)44376130158
Adjusted income from continuing operations$2,121$1,690$1,576$1,677$1,852
Reported percent change243%(17)%(3)%(9)%(3)%
Adjusted percent change26%7%(6)%(9)%5%
(Dollar amounts in millions, except per share data)20182017201620152014
Year Ended December 31,
Adjusted Diluted Earnings Per Share from Continuing Operations
Reported diluted earnings per share from continuing operations$12.79$4.32$5.21$5.35$5.73
Add: Bond redemption0.06—0.04—0.07
Add: Pension settlement charge0.03—0.010.020.02
Add: Venezuela currency devaluation————0.45
Add: Cost reduction program——0.220.43—
Add: Tax Act(0.18)1.36———
Add: Transaction costs and other charges0.920.17———
Add: Net gain on sale of businesses(8.75)————
Less: Other tax charges0.13————
Less: Purchase accounting impacts - Linde AG1.35————
Total adjustments(6.44)1.530.270.450.54
Adjusted diluted earnings per share from continuing operations$6.35$5.85$5.48$5.80$6.27
Reported percent change196%(17)%(3)%(7)%(2)%
Adjusted percent change9%7%(6)%(7)%6%

EBITDA, Adjusted EBITDA, EBITDA Margin, and Adjusted EBITDA Margin

These measures are used by investors, financial analysts and management to assess a company’s profitability.

(Dollar amounts in millions)20182017201620152014
Year Ended December 31,
Reported income from continuing operations$4,273$1,247$1,500$1,547$1,694
Add: noncontrolling interest from continuing operations1561384452
Add: interest expense - net202161190161213
Add: net pension and OPEB cost (benefit), excluding service cost(4)(4)94936
Add: income taxes8171,026551612691
Add: depreciation and amortization1,8301,1841,1221,1061,170
EBITDA$7,133$3,675$3,410$3,519$3,856
Adjustments:
Add: Cost reduction program and other charges, net$—$—$96$165$—
Add: Venezuela currency devaluation————131
Add: Transaction costs and other charges30952———
Add: Net gain on sale of businesses(3,294)————
Add: Purchase accounting impacts - Linde AG368————
Adjusted EBITDA$4,516$3,727$3,506$3,684$3,987
Reported Sales$14,900$11,437$10,534$10,776$12,273
EBITDA Margin47.9%32.1%32.4%32.7%31.4%
Adjusted EBITDA Margin30.3%32.6%33.3%34.2%32.5%

Previous: Item 4. MINE SAFETY DISCLOSURES · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK