filings.toolsItem 6. SELECTED FINANCIAL DATA
166K 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, 2019 reflects the results of both Praxair and Linde AG for the entire year. 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, | 2019(a) | 2018(a) | 2017(a) | 2016(a) | 2015(a) | ||||||||||||||
| From the Consolidated Statements of Income | |||||||||||||||||||
| Sales | $ | 28,228 | $ | 14,836 | $ | 11,358 | $ | 10,469 | $ | 10,710 | |||||||||
| Cost of sales, exclusive of depreciation and amortization | 16,644 | 9,020 | 6,382 | 5,790 | 5,852 | ||||||||||||||
| Selling, general and administrative | 3,457 | 1,629 | 1,207 | 1,145 | 1,152 | ||||||||||||||
| Depreciation and amortization | 4,675 | 1,830 | 1,184 | 1,122 | 1,106 | ||||||||||||||
| Research and development | 184 | 113 | 93 | 92 | 93 | ||||||||||||||
| Cost reduction programs and other charges | 567 | 309 | 52 | 96 | 165 | ||||||||||||||
| Net gain on sale of businesses | 164 | 3,294 | — | — | — | ||||||||||||||
| Other income (expenses) – net | 68 | 18 | 4 | 23 | 28 | ||||||||||||||
| Operating profit | 2,933 | 5,247 | 2,444 | 2,247 | 2,370 | ||||||||||||||
| Interest expense – net | 38 | 202 | 161 | 190 | 161 | ||||||||||||||
| Net pension and OPEB cost (benefit), excluding service cost | (32 | ) | (4 | ) | (4 | ) | 9 | 49 | |||||||||||
| Income from continuing operations before income taxes and equity investments | 2,927 | 5,049 | 2,287 | 2,048 | 2,160 | ||||||||||||||
| Income taxes on continuing operations | 769 | 817 | 1,026 | 551 | 612 | ||||||||||||||
| Income from continuing operations before equity investments | 2,158 | 4,232 | 1,261 | 1,497 | 1,548 | ||||||||||||||
| Income from equity investments | 114 | 56 | 47 | 41 | 43 | ||||||||||||||
| Income from continuing operations (including noncontrolling interests) | 2,272 | 4,288 | 1,308 | 1,538 | 1,591 | ||||||||||||||
| Noncontrolling interests from continuing operations | (89 | ) | (15 | ) | (61 | ) | (38 | ) | (44 | ) | |||||||||
| Income from continuing operations | $ | 2,183 | $ | 4,273 | $ | 1,247 | $ | 1,500 | $ | 1,547 | |||||||||
| Per Share Data – Linde plc Shareholders | |||||||||||||||||||
| Basic earnings per share from continuing operations | $ | 4.03 | $ | 12.93 | $ | 4.36 | $ | 5.25 | $ | 5.39 | |||||||||
| Diluted earnings per share from continuing operations | $ | 4.00 | $ | 12.79 | $ | 4.32 | $ | 5.21 | $ | 5.35 | |||||||||
| Cash dividends per share | $ | 3.50 | $ | 3.30 | $ | 3.15 | $ | 3.00 | $ | 2.86 | |||||||||
| Weighted Average Shares Outstanding (000’s) (b) | |||||||||||||||||||
| Basic shares outstanding | 541,094 | 330,401 | 286,261 | 285,677 | 287,005 | ||||||||||||||
| Diluted shares outstanding | 545,170 | 334,127 | 289,114 | 287,757 | 289,055 | ||||||||||||||
| Other Information and Ratios | |||||||||||||||||||
| Total assets | $ | 86,612 | $ | 93,386 | $ | 20,436 | $ | 19,332 | $ | 18,319 | |||||||||
| Total debt | $ | 13,956 | $ | 15,296 | $ | 9,000 | $ | 9,515 | $ | 9,231 | |||||||||
| Cash flow from operations | $ | 6,119 | $ | 3,654 | $ | 3,041 | $ | 2,789 | $ | 2,695 | |||||||||
| Net cash provided by (used for) investing activities | $ | 1,189 | $ | 5,363 | $ | (1,314 | ) | $ | (1,770 | ) | $ | (1,303 | ) | ||||||
| Net cash used for financing activities | $ | (8,997 | ) | $ | (4,998 | ) | $ | (1,656 | ) | $ | (659 | ) | $ | (1,310 | ) | ||||
| Capital expenditures | $ | 3,682 | $ | 1,883 | $ | 1,311 | $ | 1,465 | $ | 1,541 | |||||||||
| Shares outstanding (000’s) | 534,381 | 547,242 | 286,777 | 284,901 | 284,879 | ||||||||||||||
| Number of employees | 79,886 | 80,820 | 26,461 | 26,498 | 26,657 |
| (a) | Amounts for 2019 include: (i) charges of $567 million for cost reduction programs and other charges primarily related to the merger and synergies, (ii) pension settlement charges of $97 million related to lump sum benefit payments made from pension plans, (iii) a net gain on sale of businesses of $164 million and (iv) the purchase accounting impacts of the merger of $1,952 million. |
Amounts for 2018 include: (i) charges of $309 million for transaction costs and other charges primarily related to the merger, (ii) pension settlement charges of $14 million related to lump sum benefit payments made from pension plans, (iii) income tax benefit, net of $17 million 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, (v) bond redemption costs of $26 million, and (vi) the purchase accounting impacts of the merger of $714 million.
Amounts for 2017 include: (i) charges of $52 million for transaction costs related to the merger, (ii) a pension settlement charge of $2 million related to lump sum benefit payments made from an international pension plan, and (iii) income tax charges, net of $394 million due to U.S. Tax Cuts and Jobs Act.
Amounts for 2016 include: (i) a $16 million charge to interest expense related to the redemption of the $325 million 5.20% notes due 2017, (ii) a pre–tax pension settlement charge of $4 million related to lump sum benefit payments made from the U.S. supplemental pension plan, and (iii) pre–tax charges of $96 million primarily related to cost reduction actions.
Amounts for 2015 include: (i) a pre-tax charge of $165 million related to the cost reduction program and other charges; and (ii) a pre-tax charge of $7 million related to a pension settlement.
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.
| 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, Inc. and Linde AG | 21 |
| Business Overview | 23 |
| Executive Summary – Financial Results & Outlook | 24 |
| Consolidated Results and Other Information | 25 |
| Segment Discussion | 33 |
| Liquidity, Capital Resources and Other Financial Data | 43 |
| Contractual Obligations | 47 |
| Off-Balance Sheet Arrangements | 48 |
| Critical Accounting Policies | 48 |
| New Accounting Standards | 51 |
| Fair Value Measurements | 51 |
| Supplemental Pro Forma Income Statement Information | 52 |
| Non-GAAP Financial Measures | 56 |
MERGER OF PRAXAIR, INC. AND LINDE AG
Linde plc ("Linde") is a public limited company formed under the laws of Ireland in 2017 in accordance with the requirements of the business combination agreement between Praxair, Inc. ("Praxair") and Linde Aktiengesellschaft ("Linde AG"). On October 31, 2018 Praxair and Linde AG combined their respective businesses through an all-stock transaction, and became subsidiaries of Linde plc (collectively referred to as the “business combination” or "merger"). The business combination of Praxair and Linde AG has been accounted for using the acquisition method of accounting under the provisions of Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 805, “Business Combinations,” with Praxair representing the accounting acquirer under this guidance. 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), a significant portion of Linde AG’s Americas business (completed on March 1, 2019), select assets of Linde AG's South Korean industrial gases business (completed April 30, 2019), select assets of Praxair's Indian industrial gases business (completed July 12, 2019), select assets of Linde AG's Indian industrial gases business (completed December 16, 2019) as well as certain divestitures of other Praxair and Linde AG businesses in Asia that are currently expected to be sold in 2020 (collectively, the “merger-related divestitures”). In the consolidated financial statements included in Item 8, 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 1, 3 and 4 to the consolidated financial statements included in Item 8 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 had 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 segment structure as follows: Americas; EMEA
(Europe/Middle East/Africa); APAC (Asia/South Pacific) and Engineering. This new management organization structure was implemented during the first quarter 2019 and, accordingly, segment information has been retrospectively recast for all prior periods.
ITEMS AFFECTING COMPARABILITY
Because Praxair and Linde AG combined their respective businesses effective with the merger date of October 31, 2018, the year ended December 31, 2019 reflects the results and cash flows of the combined business, while the year ended December 31, 2018 includes twelve months of Praxair and two months of Linde AG. Due to the size of Linde AG’s businesses prior to the merger, the reported results for 2019 and 2018 periods are not comparable. The balance sheets at December 31, 2019 and December 31, 2018 are comparable because both periods reflect the merger.
Pro Forma Income Statement Information
Therefore, to assist with a discussion of the 2019 and 2018 results on a comparable basis, certain supplemental unaudited pro forma income statement information is provided on both a consolidated and segment basis (referred to as "pro forma income statement information" or "pro forma information").
The pro forma information has been prepared on a basis consistent with Article 11 of Regulation S-X, assuming the merger and merger-related divestitures had been consummated on January 1, 2018. In preparing this pro forma information, the historical financial information has been adjusted to give effect to pro forma Adjustments that are (i) directly attributable to the business combination and other transactions presented herein, such as the merger-related divestitures, (ii) factually supportable, and (iii) expected to have a continuing impact on the combined entity’s consolidated results. The pro forma information is based on management's assumptions and is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the business combination and merger-related divestitures had occurred as of the dates indicated or what the results would be for any future periods. Pro forma information was not developed for the year ended December 31, 2017. Also, the pro forma information does not include the impact of any revenue, cost or other operating synergies that may result from the business combination or any related restructuring costs.
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.
Linde’s industrial gas operations are managed on a geographical basis and in 2019 83% of sales were generated by Linde's three geographic segments (Americas, EMEA and APAC) and the remaining 17% is related primarily to the Engineering segment, and to a lesser extent Other (see Note 20 to the consolidated financial statements for operating segment details).
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 twelve 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 States | Germany | China & Taiwan | ||
| Brazil | United Kingdom | Australia | ||
| Mexico | Eastern Europe | South Korea | ||
| Canada | India |
The company manufactures and distributes its industrial gas 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
2019 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 $28,228 million were 90% above 2018 sales of $14,836 million, primarily driven by the merger that contributed 89% to sales, net of divestitures. Underlying sales increased 1% driven by 3% higher pricing across all geographic segments and 1% volume growth, partially offset by unfavorable currency translation and lower cost pass-through. |
| • | Reported operating profit of $2,933 million was 44% below 2018 primarily driven by the net gain on sale of businesses in 2018 partially offset by the impact of the merger, including purchase accounting impacts, in the current year. On an adjusted pro forma basis, operating profit increased $476 million, or 10%, for 2019 versus 2018, as the impacts of higher pricing and volumes were partially offset by unfavorable currency impacts and cost inflation.* |
| • | Income from continuing operations of $2,183 million and diluted earnings per share from continuing operations of $4.00 decreased from $4,273 million and $12.79, respectively in 2018. Adjusted pro forma income from continuing operations of $4,003 million and adjusted pro forma diluted earnings per share from continuing operations of $7.34 were 17% and 19%, respectively above 2018 adjusted pro forma amounts.* |
| • | Cash flow from operations was $6,119 million, or 22% of sales. Capital expenditures were $3,682 million; dividends paid were $1,891 million; net purchases of ordinary shares of $2,586 million; and debt repayments, net were $1,260 million. |
- A reconciliation of the adjusted pro forma amounts can be found in the "Supplemental Pro Forma Income Statement Information" and "Non-GAAP Financial Measures" section in this MD&A. See Notes 1, 3, 4, 5, 7, 13 and 18 to the consolidated financial statements.
2020 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, 2019, Linde’s sale of gas backlog of large projects under construction was $4.4 billion. This represents the total estimated capital cost of large plants under construction. APAC and Americas represent 64 percent and 29 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 outlook 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, www.linde.com, but are not incorporated herein.
CONSOLIDATED RESULTS AND OTHER INFORMATION
The following table provides summary information for 2019, 2018 and 2017. The reported amounts are GAAP amounts from the Consolidated Statements of Income. The pro forma and adjusted pro forma amounts are intended to supplement investors' understanding of the company's financial information and are not a substitute for GAAP measures. 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:
| Reported Amounts (GAAP) | Pro Forma Amounts (a) | |||||||||||||||||||||||||||
| (Millions of dollars, except per share data) Year Ended December 31, | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | 2019 | 2018 | 2019 vs. 2018 | ||||||||||||||||||||
| Reported Amounts | ||||||||||||||||||||||||||||
| Sales | $ | 28,228 | $ | 14,836 | $ | 11,358 | 90 | % | 31 | % | $ | 28,163 | $ | 28,084 | — | % | ||||||||||||
| Cost of sales, exclusive of depreciation and amortization | $ | 16,644 | $ | 9,020 | $ | 6,382 | 85 | % | 41 | % | $ | 16,584 | $ | 16,929 | (2 | )% | ||||||||||||
| As a percent of sales | 59.0 | % | 60.8 | % | 56.2 | % | 58.9 | % | 60.3 | % | ||||||||||||||||||
| Selling, general and administrative | $ | 3,457 | $ | 1,629 | $ | 1,207 | 112 | % | 35 | % | $ | 3,456 | $ | 3,635 | (5 | )% | ||||||||||||
| As a percent of sales | 12.2 | % | 11.0 | % | 10.6 | % | 12.3 | % | 12.9 | % | ||||||||||||||||||
| Depreciation and amortization | $ | 4,675 | $ | 1,830 | $ | 1,184 | 155 | % | 55 | % | $ | 4,675 | $ | 4,924 | (5 | )% | ||||||||||||
| Cost reduction programs and other charges (b) | $ | 567 | $ | 309 | $ | 52 | $ | 377 | $ | 56 | ||||||||||||||||||
| Net gain on sale of businesses (b) | $ | 164 | $ | 3,294 | $ | — | $ | — | $ | — | ||||||||||||||||||
| Operating Profit | $ | 2,933 | $ | 5,247 | $ | 2,444 | (44 | )% | 115 | % | $ | 2,955 | $ | 2,561 | 15 | % | ||||||||||||
| Operating margin | 10.4 | % | 35.4 | % | 21.5 | % | 10.5 | % | 9.1 | % | ||||||||||||||||||
| Interest expense – net | $ | 38 | $ | 202 | $ | 161 | (81 | )% | 25 | % | $ | 38 | $ | 379 | (90 | )% | ||||||||||||
| Net pension and OPEB cost (benefit), excluding service cost | $ | (32 | ) | $ | (4 | ) | $ | (4 | ) | 700 | % | — | % | $ | (129 | ) | $ | (165 | ) | (22 | )% | |||||||
| Effective tax rate | 26.3 | % | 16.2 | % | 44.9 | % | 24.6 | % | 28.5 | % | ||||||||||||||||||
| Income from equity investments | $ | 114 | $ | 56 | $ | 47 | 104 | % | 19 | % | $ | 114 | $ | 52 | 119 | % | ||||||||||||
| Noncontrolling interests from continuing operations | $ | (89 | ) | $ | (15 | ) | $ | (61 | ) | (75 | )% | $ | (89 | ) | $ | — | ||||||||||||
| Income from continuing operations | $ | 2,183 | $ | 4,273 | $ | 1,247 | (49 | )% | 243 | % | $ | 2,322 | $ | 1,729 | 34 | % | ||||||||||||
| Diluted earnings per share from continuing operations | $ | 4.00 | $ | 12.79 | $ | 4.32 | (69 | )% | 196 | % | $ | 4.25 | $ | 3.11 | 37 | % | ||||||||||||
| Diluted shares outstanding (c) | 545,170 | 334,127 | 289,114 | 63 | % | 16 | % | 545,170 | 555,151 | (2 | )% | |||||||||||||||||
| Number of employees | 79,886 | 80,820 | 26,461 | |||||||||||||||||||||||||
| Adjusted Pro forma Amounts (d) | ||||||||||||||||||||||||||||
| Operating profit | $ | 5,272 | $ | 4,796 | 10 | % | ||||||||||||||||||||||
| Operating margin | 18.7 | % | 17.1 | % | ||||||||||||||||||||||||
| Income from continuing operations | $ | 4,003 | $ | 3,433 | 17 | % | ||||||||||||||||||||||
| Diluted earnings per share from continuing operations | $ | 7.34 | $ | 6.19 | 19 | % | ||||||||||||||||||||||
| Other Financial Data (d) | ||||||||||||||||||||||||||||
| EBITDA and pro forma EBITDA from continuing operations | $ | 7,722 | $ | 7,133 | $ | 3,675 | 8 | % | 94 | % | $ | 7,744 | $ | 7,537 | 3 | % | ||||||||||||
| As percent of sales | 27.4 | % | 48.1 | % | 32.4 | % | (43 | )% | 48 | % | 27.5 | % | 26.8 | % | ||||||||||||||
| Adjusted pro forma EBITDA from continuing operations | $ | 8,178 | $ | 7,603 | 8 | % | ||||||||||||||||||||||
| As percent of sales | 29.0 | % | 27.1 | % |
| (a) | Pro forma amounts are supplemental to the GAAP presentations and are prepared on a basis consistent with Article 11 of Regulation S-X. See "Supplemental Pro Forma Income Statement Information" and "Non-GAAP Reconciliations" sections of this MD&A. |
| (b) | See Notes 4 and 5 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) | Adjusted pro forma amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted pro forma amounts can be found in the "Supplemental Pro Forma Income Statement Information" and "Non-GAAP Reconciliations" sections of this MD&A. |
Results of Operations
The following table provides a summary of changes in consolidated reported and pro forma sales:
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||
| % Change | % Change | ||||||||
| Reported | Pro forma | Reported | |||||||
| Factors Contributing to Changes - Sales | |||||||||
| Volume | 1 | % | 2 | % | 4 | % | |||
| Price/Mix | 3 | % | 2 | % | 2 | % | |||
| Cost pass-through | (1 | )% | (1 | )% | 1 | % | |||
| Currency | (2 | )% | (4 | )% | (1 | )% | |||
| Acquisitions/Divestitures | 89 | % | 1 | % | 25 | % | |||
| 90 | % | — | % | 31 | % |
2019 Compared With 2018
Sales
Reported sales increased $13,392 million, or 90% for the year primarily due to the merger, net of related divestitures. On a pro forma basis sales increased $79 million in 2019 compared to 2018.
On a reported basis, sales increased 90% to $28,228 million in 2019 compared to $14,836 million in 2018 primarily due to the merger, net of related divestitures. Volume increased sales by 1% driven by higher volumes largely in the APAC segment, including new project start-ups. Higher pricing across all geographic segments contributed 3% to sales. Currency translation decreased sales by 2% driven by the weakening of the Brazilian real, Canadian dollar and Chinese yuan against the US dollar. Lower cost pass-through, primarily natural gas, decreased sales by 1% with minimal impact on operating profit.
On a pro forma basis, sales were relatively flat with prior year. Volume growth of 2% was largely driven by higher volumes in the Americas and APAC segments, including new project start-ups. Higher pricing across the gases segments contributed 2% to sales. Unfavorable currency translation, primarily driven by the weakening of the Euro, British pound, Chinese yuan and Australian dollar, decreased sales by 4%. Lower cost pass-through, primarily natural gas, decreased sales by 1% with minimal impact on operating profit. Acquisitions, largely in the Americas segment, contributed 1% to sales.
Cost of sales, exclusive of depreciation and amortization
Reported cost of sales, exclusive of depreciation and amortization increased $7,624 million, or 85%, for the year primarily due to the merger, net of related divestitures.
On a pro forma basis, cost of sales, exclusive of depreciation and amortization decreased $345 million or 2% in 2019 as compared to 2018. Pro forma cost of sales, exclusive of depreciation and amortization was 58.9% of sales in the year versus 60.3% of sales for 2018. The decrease as a percentage of sales in the year was due primarily to higher pricing.
Selling, general and administrative expenses
Reported selling, general and administrative ("SG&A") expenses increased $1,828 million, or 112%, in 2019 to $3,457 million primarily due to the merger. On a pro forma basis, SG&A decreased $179 million, or 5%, versus the 2018 period.
On a reported basis, SG&A increased 112% in 2019, primarily due to the merger. SG&A was 12.2% of sales in 2019 versus 11.0% in 2018, primarily due to the merger.
On a pro forma basis, SG&A decreased 5% in 2019 versus 2018. SG&A was 12.3% of sales in 2019 versus 12.9% in 2018. Currency impacts decreased SG&A by approximately $145 million in the 2019 period. Excluding currency impacts, underlying SG&A decreased due to cost reduction actions and productivity improvements which also drove the improvement of SG&A as a percentage of sales in the period.
Depreciation and amortization
Reported depreciation and amortization expense increased $2,845 million, or 155%, versus 2018. The increase is primarily due to the merger, including $1,940 million of purchase accounting impacts related to the depreciation and amortization of the fair value adjustments of fixed assets and intangible assets acquired in the merger.
On a pro forma basis, depreciation and amortization expense decreased $249 million, or 5%, versus 2018. Currency movements decreased depreciation and amortization by approximately $197 million for the year. Excluding currency effects, depreciation and amortization expense decreased approximately $52 million, primarily driven by measurement period adjustments recognized in 2019 (see Note 3 to the consolidated financial statements), partially offset by increases due to large project start-ups.
Cost reduction programs and other charges
Linde recorded cost reduction programs and other charges of $567 million and $309 million for 2019 and 2018, respectively, primarily related to merger and synergy-related costs and an asset impairment in the third quarter 2019 of approximately $73 million related to a joint venture in APAC resulting from an unfavorable arbitration ruling (see Note 5 to the consolidated financial statements).
On an adjusted pro forma basis, these costs have been eliminated in both periods.
Operating profit
Reported operating profit decreased $2,314 million in 2019, or 44%, primarily driven by the net gain on sale of businesses in 2018 partially offset by the impact of the merger, including purchase accounting impacts, in the current year. On an adjusted pro forma basis, operating profit increased $476 million, or 10%, for 2019 versus 2018.
On a reported basis, operating profit decreased $2,314 million, or 44%. 2019 includes Linde AG's operating results for the full year and a gain on merger-related divestitures of $164 million, which was offset by $1,952 million which primarily related to $1,940 million of purchase accounting charges for additional depreciation and amortization, and $567 million in cost reduction program and other charges. 2018 included Linde AG's operating results from October 31, 2018 forward and a gain on merger-related divestitures of $3,294 million, partially offset by purchase accounting impacts of $714 million and $309 million of merger-related charges.
On an adjusted pro forma basis, which excludes the impacts of purchase accounting, cost reduction programs and other charges and net gains from merger-related divestitures, operating profit increased $476 million, or 10%, as the impacts of higher pricing and volumes were partially offset by unfavorable currency impacts and cost inflation. A discussion of operating profit by segment is included in the segment discussion that follows.
Interest expense - net
Reported interest expense – net in 2019 decreased $164 million, or 81%, versus 2018. On an adjusted pro forma basis interest expense decreased $145 million, or 52% in 2019 as compared to 2018.
On a reported basis, interest expense - net decreased $164 million in 2019 and included a decrease of $96 million related to purchase accounting impacts on the fair value of debt acquired in the merger. Excluding this purchase accounting impact, reported interest expense decreased $68 million in the year as interest on debt acquired in the merger was more than offset by higher interest income.
On an adjusted pro forma basis, interest expense - net decreased $145 million in 2019 primarily due to lower debt levels and higher interest income.
Net pension and OPEB cost (benefit), excluding service cost
Reported net pension and OPEB cost (benefit), excluding service cost was a benefit of $32 million in 2019 versus a benefit of $4 million in 2018 and included pension settlement charges of $97 million and a net $8 million curtailment charge (see Note 18 to the consolidated financial statements). Excluding the impact of these charges, the net pension and OPEB benefit, excluding service cost increased $133 million in 2019, primarily due to the impact of pension and OPEB plans acquired in the merger.
On an adjusted pro forma basis, net pension and OPEB (benefit), excluding service cost was a benefit of $129 million in 2019 versus a benefit of $165 million in 2018.
Effective tax rate
The reported effective tax rate ("ETR") for 2019 was 26.3% versus 16.2% in 2018. 2018 included the impact of the sale of Praxair's European industrial gas business (see Note 7 to the consolidated financial statements).
On an adjusted pro forma basis, the ETR for 2019 was 24.0% versus 25.8% in 2018.
Income from equity investments
Reported income from equity investments for 2019 increased $58 million to $114 million largely related to investments in APAC and EMEA. This increase is primarily related to the merger.
On an adjusted pro forma basis, income from equity investments for 2019 increased $55 million to $171 million. The increase is primarily related to increased earnings from equity investments.
Noncontrolling interests from continuing operations
At December 31, 2019, noncontrolling interests from continuing operations consisted primarily of noncontrolling shareholders’ investments in APAC (primarily in China) and surface technologies.
Reported noncontrolling interests from continuing operations increased $74 million to $89 million in 2019 from $15 million in 2018, primarily driven by the merger. 2019 noncontrolling interests includes a $33 million impact for an asset impairment charge in the third quarter related to a joint venture in APAC (see Note 5 to the consolidated financial statements).
On an adjusted pro forma basis, noncontrolling interests from continuing operations increased $10 million in 2019 driven by higher income from continuing operations.
Income from continuing operations
Reported income from continuing operations decreased $2,090 million, or 49%, primarily due to the 2018 gain on merger-related divestitures, partially offset by the merger. Other impacts related to interest - net; net pension and OPEB cost (benefit), excluding service cost; income taxes; income from equity investments; and noncontrolling interest largely offset in the aggregate.
On an adjusted pro forma basis, which excludes the impacts of purchase accounting and other non-GAAP adjustments, income from continuing operations increased $570 million, or 17%, in 2019 primarily due to higher adjusted pro forma operating profit, lower adjusted pro forma interest expense-net, lower adjusted ETR, and higher adjusted pro forma income from equity investments.
Diluted earnings per share from continuing operations
Reported diluted earnings per share from continuing operations decreased $8.79, or 69%, in 2019 as compared to 2018, primarily due to lower net income from continuing operations and higher diluted shares outstanding as a result of the merger.
On an adjusted pro forma basis, diluted EPS of $7.34 in 2019 increased 19% versus 2018, primarily due to higher adjusted pro forma income from continuing operations and lower diluted shares outstanding.
Employees
The number of employees at December 31, 2019 was 79,886, a decrease of 934 employees from December 31, 2018 primarily driven by cost reduction actions partially offset by acquisitions.
Other Financial Data
EBITDA increased to $7,722 million in 2019 from $7,133 million in 2018, primarily due to the merger.
Adjusted pro forma EBITDA from continuing operations increased to $8,178 million for 2019 as compared to $7,603 million in 2018 primarily due to higher income from continuing operations versus the prior year period.
See the "Supplemental Pro Forma Income Statement Information" for pro forma amounts and "Non-GAAP Reconciliations" for adjusted pro forma amounts sections below for definitions and reconciliations of these pro forma and adjusted pro forma non-GAAP measures to reported GAAP amounts.
Other Comprehensive Income (Loss)
Other comprehensive loss for the year ended December 31, 2019 of $435 million resulted primarily from a decrease in the funded status of the company's largest retirement programs. Driven by the low discount rate environment,
the other comprehensive loss of $544 million related to the remeasurement of such retirement programs was partially offset by benefits from cumulative translation adjustments. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars, and are largely driven by the movement of the U.S. dollar against major currencies including the Euro, the Chinese yuan and the British pound. See the "Currency" section of the MD&A for exchange rates used for translation purposes and Note 9 to the consolidated financial statements for a summary of the currency translation adjustment component of accumulated other comprehensive income by segment.
2018 Compared With 2017
Sales increased 31% to $14,836 million in 2018 compared to $11,358 million in 2017 primarily reflecting the merger with Linde AG which contributed 25% 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%.
Selling, general and administrative expenses increased $422 million, or 35%, in 2018 to $1,629 million primarily due to the merger. SG&A was 11.0% 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.
Cost reduction programs 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).
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 $.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.
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 Latin America and parts of Asia. China has announced plans to implement its national carbon emissions trading system in 2020, 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 cost 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 energy use and GHG footprint through research and development in customer applications and rigorous operational 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 and Australia may create additional markets 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 2019 were not significant. Linde anticipates that future annual environmental protection expenditures will be similar to 2019, 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 $107 million in 2019, $24 million in 2018 and $58 million in 2017. The net periodic pension cost for 2019 includes pension settlement charges of $97 million related to lump sum payments, which were triggered by either a change in control provision or merger-related divestitures and a net curtailment charge of $8 million for termination benefits, primarily in connection with a defined benefit pension plan freeze. Settlement charges for 2018 and 2017 were $14 million and $2 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 $504 million as of December 31, 2019 and a deficit of $556 million at December 31, 2018. The funded status for international plans was a deficit of $1,801 million as of December 31, 2019 and a deficit of $1,241 million at December 31, 2018. In the U.S., the benefit from the actual return on assets more than offset the impacts of unfavorable liability experience, resulting from the low discount rate environment. For the international plans, the unfavorable impact of lower discount rates outweighed favorable plan asset experience.
Global pension contributions were $94 million in 2019, $87 million in 2018 and $19 million in 2017. 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 2020 are currently expected to be in the range of $50 million to $80 million.
Linde assumes expected returns on plan assets for 2020 of 7.00% and 5.31% for the U.S. and international plans, respectively, which are consistent with the long-term expected returns on its investment portfolios.
Excluding the impact of any settlements, 2020 consolidated pension expense is expected to be a benefit of approximately $45 million. The benefit derived from the expected return on assets assumption for Linde's most significant plans is anticipated to more than offset the expense from service and interest cost accruals and the amortization of deferred losses.
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 $10 million per occurrence for vehicle liability in the United States, $5 million per occurrence for workers' compensation and general liability. In addition, the company self retains risk up to $5 million at its various properties worldwide for property damage resulting from fire, flood and other perils effecting its properties along with a separate $5 million deductible on all business interruption resulting from a major peril loss. To mitigate its aggregate loss potential above these retentions, the company purchases catastrophic 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, 2019 and 2018, the company had recorded a total of $66 million and $60 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
Effective October 31, 2018, Praxair and Linde AG completed the previously announced merger, resulting in the formation of Linde plc (see Note 1 to the consolidated financial statements for additional information on the merger). As a result of the merger and effective with the lifting of the hold separate order effective on March 1, 2019, new operating segments were created which are used by the company's Chief Operating Decision Maker ("CODM") to allocate company resources and assess performance. Linde’s operations consist of two major product lines: industrial gases and engineering. As further described in the following paragraph, Linde’s industrial gases operations are managed on a geographic basis, which represents three of the company's new reportable segments - Americas, EMEA (Europe/Middle East/Africa), and APAC (Asia/South Pacific); a fourth reportable segment which represents the company's Engineering business, designs and manufactures equipment for air separation and other industrial gas applications specifically for end customers and is managed on a worldwide basis operating in all geographic segments. Other consists of corporate costs and a few smaller businesses which individually do not meet the quantitative thresholds for separate presentation.
The industrial gases product line centers on the manufacturing and distribution of atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). Many of these products are co-products of the same manufacturing process. Linde manufactures and distributes nearly all of its products and manages its customer relationships on a regional basis. Linde’s industrial gases are distributed to various end-markets within a regional segment through one of three basic distribution methods: on-site or tonnage; merchant or bulk; and packaged or cylinder gases. The distribution methods are generally integrated in order to best meet the customer’s needs and very few of its products can be economically transported outside of a region. Therefore, the distribution economics are specific to the various geographies in which the company operates and are consistent with how management assesses performance.
The company’s measure of profit/loss for segment reporting purposes remains unchanged - Segment operating profit. Segment operating profit is defined as operating profit excluding purchase accounting impacts of the Linde AG merger, intercompany royalties, and items not indicative of ongoing business trends. This is the manner in which the company’s CODM assesses performance and allocates resources. For a description of Linde's previous operating segments, refer to Note 20 to the consolidated financial statements of Linde's 2018 Annual Report on Form 10-K.
The table below presents sales and operating profit information about reportable segments and Other for the year ended December 31, 2019, 2018 and 2017. The year ended December 31, 2019 reflects the results of both Praxair and Linde AG for the entire year. 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. Prior periods presented have been recast to be consistent with the new segment structure.:
| Reported | Variance | ||||||||||||||||
| (Millions of dollars) Year Ended December 31, | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||
| Sales | |||||||||||||||||
| Americas | $ | 10,993 | $ | 8,017 | $ | 7,204 | 37 | % | 11 | % | |||||||
| EMEA | 6,643 | 2,644 | 1,520 | 151 | % | 74 | % | ||||||||||
| APAC | 5,839 | 2,446 | 1,571 | 139 | % | 56 | % | ||||||||||
| Engineering | 2,799 | 459 | N/A | N/M | N/A | ||||||||||||
| Other | 1,954 | 1,270 | 1,063 | 54 | % | 19 | % | ||||||||||
| $ | 28,228 | $ | 14,836 | $ | 11,358 | 90 | % | 31 | % | ||||||||
| Operating Profit | |||||||||||||||||
| Americas | $ | 2,578 | $ | 2,053 | $ | 1,854 | 26 | % | 11 | % | |||||||
| EMEA | 1,367 | 481 | 317 | 184 | % | 52 | % | ||||||||||
| APAC | 1,198 | 465 | 329 | 158 | % | 41 | % | ||||||||||
| Engineering | 390 | 14 | N/A | N/M | N/A | ||||||||||||
| Other | (245 | ) | (37 | ) | (4 | ) | N/M | N/M | |||||||||
| Segment operating profit | 5,288 | 2,976 | 2,496 | 78 | % | 19 | % | ||||||||||
| Reconciliation to reported operating Profit : | |||||||||||||||||
| Cost reduction programs and other charges (Note 5) | (567 | ) | (309 | ) | (52 | ) | |||||||||||
| Net gain on sale of businesses | 164 | 3,294 | N/A | ||||||||||||||
| Purchase accounting impacts - Linde AG | (1,952 | ) | (714 | ) | N/A | ||||||||||||
| Total operating profit | $ | 2,933 | $ | 5,247 | $ | 2,444 |
| Pro Forma | Variance | |||||||||
| (Dollar amounts in millions) Year Ended December 31, | 2019 | 2018 | 2019 vs. 2018 | |||||||
| Sales | ||||||||||
| Americas | $ | 10,989 | $ | 10,539 | 4 | % | ||||
| EMEA | 6,643 | 6,991 | (5 | )% | ||||||
| APAC | 5,779 | 5,950 | (3 | )% | ||||||
| Engineering | 2,799 | 2,792 | — | % | ||||||
| Other | 1,953 | 1,812 | 8 | % | ||||||
| $ | 28,163 | $ | 28,084 | — | % | |||||
| Operating Profit | ||||||||||
| Americas | $ | 2,577 | $ | 2,433 | 6 | % | ||||
| EMEA | 1,367 | 1,344 | 2 | % | ||||||
| APAC | 1,184 | 1,029 | 15 | % | ||||||
| Engineering | 390 | 285 | 37 | % | ||||||
| Other | (246 | ) | (295 | ) | (17 | )% | ||||
| Segment operating profit | $ | 5,272 | $ | 4,796 | 10 | % |
Americas
| Variance | |||||||||||||||||
| (Dollar amounts in millions) Year Ended December 31, | 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | ||||||||||||
| Reported sales | $ | 10,993 | $ | 8,017 | $ | 7,204 | 37 | % | 11 | % | |||||||
| Pro forma sales | $ | 10,989 | $ | 10,539 | N/A | 4 | % | N/A | |||||||||
| Reported operating profit | $ | 2,578 | $ | 2,053 | $ | 1,854 | 26 | % | 11 | % | |||||||
| As a percent of sales | 23.5 | % | 25.6 | % | 25.7 | % | |||||||||||
| Pro forma operating profit | $ | 2,577 | $ | 2,433 | N/A | 6 | % | N/A | |||||||||
| As a percent of sales | 23.5 | % | 23.1 | % | N/A |
| 2019 vs. 2018 | 2018 vs. 2017 | |||||||||
| % Change | % Change | |||||||||
| Reported | Pro forma | Reported | ||||||||
| Factors Contributing to Changes - Sales | ||||||||||
| Volume/Equipment | — | % | 1 | % | 3 | % | ||||
| Price/Mix | 3 | % | 3 | % | 2 | % | ||||
| Cost pass-through | (1 | )% | (1 | )% | 1 | % | ||||
| Currency | (2 | )% | (2 | )% | (2 | )% | ||||
| Acquisitions/Divestitures | 37 | % | 3 | % | 7 | % | ||||
| 37 | % | 4 | % | 11 | % |
The Americas segment includes Linde’s industrial gases operations in approximately 20 countries including the United States, Canada, Mexico and Brazil.
Sales
Reported sales for the Americas segment for 2019 increased $2,976 million, or 37%, versus 2018, primarily due to the merger. On a pro forma basis, sales increased $450 million, or 4%, versus 2018.
On a reported basis, sales increased 37% in 2019 primarily due to the merger. Higher pricing contributed 3% to sales. Unfavorable currency translation decreased sales by 2%, primarily driven by the weakening of the Brazilian real, Mexican peso and Canadian dollar against the U.S. Dollar. Lower cost past-through, primarily natural gas, decreased sales by 1% with minimal impact on operating profit.
On a pro forma basis, volume growth contributed 1% to sales in 2019 as compared to 2018 primarily driven by base volume growth in the United States and Latin America and project start ups in the United States Gulf Coast. Higher pricing contributed 3% to sales. Currency translation decreased sales by 2%. Acquisitions and divestitures increased sales by 3%, related primarily to acquisitions in North America. Lower cost pass-through decreased sales by 1% with minimal impact on operating profit.
Reported sales for 2018 increased $813 million, or 11%, versus 2017 primarily due to the merger which contributed 7% to sales. Underlying sales growth was 4%, driven by higher volumes and higher price. Unfavorable currency impacts decreased sales by 2%. Higher cost pass-through increased sales by 1% with minimal impact on operating profit.
Operating Profit
Reported operating profit for the Americas segment for 2019 increased $525 million, or 26% from 2018, due primarily to the merger. On a pro forma basis, operating profit increased $144 million, or 6%, for 2019 as compared to 2018.
On a reported basis, operating profit increased 26% in 2019 largely driven by the merger and higher pricing, partially offset by unfavorable currency translation impacts of 2%.
Pro forma operating profit in the Americas segment increased $144 million for 2019, or 6%, versus the 2018 period. Operating growth from higher volumes, higher price and acquisitions was partially offset by unfavorable currency translation impacts of 2% in the year. The 2018 year also included net gains on asset disposals of approximately $20 million.
Reported operating profit for 2018 increased $199 million, or 11%, driven primarily by the merger, higher volumes and higher price partially offset by unfavorable currency translation. The 2018 period also included net gains on asset disposals of $13 million.
EMEA
| (Dollar amounts in millions) Year Ended December 31, | Variance | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||
| Reported sales | $ | 6,643 | $ | 2,644 | $ | 1,520 | 151 | % | 74 | % | |||||||
| Pro forma sales | $ | 6,643 | $ | 6,991 | N/A | (5 | )% | N/A | |||||||||
| Reported operating profit | $ | 1,367 | $ | 481 | $ | 317 | 184 | % | 52 | % | |||||||
| As a percent of sales | 20.6 | % | 18.2 | % | 20.9 | % | |||||||||||
| Pro forma operating profit | $ | 1,367 | $ | 1,344 | N/A | 2 | % | N/A | |||||||||
| As a percent of sales | 20.6 | % | 19.2 | % | N/A |
| 2019 vs. 2018 | 2018 vs. 2017 | |||||||||
| % Change | % Change | |||||||||
| Reported | Pro forma | Reported | ||||||||
| Factors Contributing to Changes | ||||||||||
| Volume | (1 | )% | (1 | )% | 1 | % | ||||
| Price/Mix | 1 | % | 2 | % | 2 | % | ||||
| Cost pass-through | (1 | )% | — | % | 2 | % | ||||
| Currency | (1 | )% | (6 | )% | 4 | % | ||||
| Acquisitions/Divestitures | 153 | % | — | % | 65 | % | ||||
| 151 | % | (5 | )% | 74 | % |
The EMEA segment includes Linde's industrial gases operations in approximately 45 European, Middle Eastern and African countries including Germany, France, Sweden, the Republic of South Africa, and the United Kingdom.
Sales
On a reported basis, EMEA segment sales increased by $3,999 million, or 151%, in 2019 as compared to 2018, primarily due to the merger, net of related divestitures. On a pro forma basis, sales decreased $348 million, or 5%, in 2019 versus 2018.
On a reported basis, sales increased 151% in 2019 driven primarily by the net impact of the merger with Linde AG and the related divestiture of Praxair's European gases business in the fourth quarter of 2018. Excluding this net impact, sales decreased 2%. Volumes decreased 1% driven by weaker industrial production. Higher price contributed 1% to sales. Unfavorable currency translation and cost pass-through each decreased sales by 1%.
On a pro forma basis, sales decreased 5% in 2019, primarily driven by unfavorable currency translation due to the weakening of the Euro, British pound and South African rand against the U.S. Dollar which decreased sales by 6% . Higher price increased sales by 2%. Volumes decreased 1% driven by weaker industrial production.
Reported sales increased $1,124 million, or 74%, in 2018 driven primarily by the merger, net of related divestitures. Excluding the impact of the merger and related divestitures, sales increase 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
On a reported basis, operating profit for the EMEA segment increased by $886 million, or 184%, in 2019 as compared to 2018. On a pro forma basis, operating profit increased $23 million, or 2%, in 2019 versus the respective 2018 period.
On a reported basis, operating profit increased 184% in 2019, driven primarily by the net impact of the merger with Linde AG and the related divestiture of Praxair's European gases business in the fourth quarter of 2018.
On a pro forma basis, operating profit increased 2% in 2019 as compared to 2018 as higher pricing and the impact of cost reduction actions more than offset the impacts of unfavorable currency translation and cost inflation.
Reported operating profit increased $164 million, or 52%, in 2018 driven primarily by the merger, net of related divestitures. Favorable currency translation increased operating profit by 5%. Excluding the impact of the merger and related divestitures and currency, operating profit increased driven by higher price and higher volumes, partially offset by cost inflation.
APAC
| (Dollar amounts in millions) Year Ended December 31, | Variance | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||
| Reported sales | $ | 5,839 | $ | 2,446 | $ | 1,571 | 139 | % | 56 | % | |||||||
| Pro forma sales | $ | 5,779 | $ | 5,950 | N/A | (3 | )% | N/A | |||||||||
| Reported operating profit | $ | 1,198 | $ | 465 | $ | 329 | 158 | % | 41 | % | |||||||
| As a percent of sales | 20.5 | % | 19.0 | % | |||||||||||||
| Pro forma operating profit | $ | 1,184 | $ | 1,029 | N/A | 15 | % | N/A | |||||||||
| As a percent of sales | 20.5 | % | 17.3 | % | N/A |
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||
| % Change | % Change | ||||||||
| Reported | Pro forma | Reported | |||||||
| Factors Contributing to Changes | |||||||||
| Volume | 4 | % | 1 | % | 9 | % | |||
| Price/Mix | 2 | % | 2 | % | 2 | % | |||
| Cost pass-through | — | % | (1 | )% | 1 | % | |||
| Currency | (3 | )% | (4 | )% | 1 | % | |||
| Acquisitions/Divestitures | 136 | % | (1 | )% | 43 | % | |||
| 139 | % | (3 | )% | 56 | % |
The APAC segment includes Linde's industrial gases operations in approximately 20 Asian and South Pacific countries and regions including China, Australia, India, South Korea and Taiwan.
Sales
On a reported basis, APAC segment sales increased by $3,393 million, or 139%, in 2019 as compared to 2018, primarily due to the merger. On a pro forma basis, sales decreased $171 million, or 3%, in 2019 versus 2018.
On a reported basis, sales increased 139% in 2019 driven by the merger. Unfavorable currency translation decreased sales by 3%, driven primarily by the weakening of the Chinese yuan, Korean won and Indian rupee against the U.S. Dollar. Excluding the impacts of the merger and currency, sales increased by 6% driven by higher base volumes, new project start ups and higher price.
On a pro forma basis, sales decreased 3% in 2019. Higher pricing increased sales by 2%. Higher volumes contributed 1% to sales driven by higher base volumes and new project start-ups. Currency translation decreased sales by 4%. Lower cost pass-through decreased sales by 1% with minimal impact on operating profit. Acquisitions and divestitures decreased sales by 1%.
Reported sales in 2018 increased $875 million, or 56%, versus 2017 driven primarily by the merger which contributed 43% to sales. 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.
Operating Profit
On a reported basis, operating profit for the APAC segment increased by $733 million, or 158%, in 2019 as compared to 2018, due primarily to the merger. On a pro forma basis, operating profit increased $155 million, or 15%, in 2019 versus the respective 2018 period.
On a reported basis, operating profit increased 158% in 2019, driven by the net impact of the merger with Linde AG. Unfavorable currency translation decreased operating profit by 3% for the year. Excluding the merger and currency impacts, operating profit growth was driven by higher price and cost reduction programs.
On a pro forma basis, operating profit increased 15% in 2019 as compared to 2018. Unfavorable currency translation decreased operating profit by 5% in the year. Excluding currency impacts, operating growth was driven by higher price and cost reduction programs.
Reported operating profit in 2018 increased $136 million, or 41%, versus 2017 driven primarily by the merger, higher volumes and price. Operating profit for 2018 included a $22 million asset impairment charge, offset by a litigation settlement gain.
Engineering
| (Dollar amounts in millions) Year Ended December 31, | Variance | ||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||
| Reported sales | $ | 2,799 | $ | 459 | N/A | 510 | % | 100 | % | ||||||
| Pro forma sales | $ | 2,799 | $ | 2,792 | N/A | — | % | N/A | |||||||
| Reported operating profit | $ | 390 | $ | 14 | N/A | N/M | 100 | % | |||||||
| As a percent of sales | 13.9 | % | 3.1 | % | |||||||||||
| Pro forma operating profit | $ | 390 | $ | 285 | N/A | 37 | % | N/A | |||||||
| As a percent of sales | 13.9 | % | 10.2 | % | N/A |
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||
| % Change | % Change | ||||||||
| Reported | Pro forma | Reported | |||||||
| Factors Contributing to Changes | |||||||||
| Volume/Price | 8 | % | 4 | % | — | % | |||
| Currency | (2 | )% | (4 | )% | — | % | |||
| Acquisitions/Divestitures | 504 | % | — | % | 100 | % | |||
| 510 | % | — | % | 100 | % |
Sales
Reported Engineering segment sales increased $2,340 million, or 510%, in 2019 as compared to the respective 2018 period. On a pro forma basis, segment sales increased $7 million in 2019 as compared to the respective 2018 period.
On a reported basis, 2019 sales increased 510% in year primarily related to the merger of the Linde Engineering business. Excluding the impact of the merger, volume growth of 8% was partially offset by unfavorable currency translation of 2%.
On a pro forma basis, 2019 sales were flat versus 2018 as volume growth of 4% was offset by unfavorable currency translation of 4%.
Reported sales for 2018 increased 100% versus 2017 due to the merger of the Linde Engineering business.
Operating profit
Reported Engineering segment operating profit increased $376 million, or 2,686%, in 2019 versus 2018. On a pro forma basis, operating profit increased $105 million, or 37%, in 2019 versus 2018.
On a reported basis, operating profit increased in 2019 related primarily to the merger of the Linde Engineering business.
On a pro forma basis, operating profit increased 37% for the year. Unfavorable currency translation decreased operating profit by 4% in 2019. Excluding the impact of currency, operating profit increased due to timing of project completion, favorable costs and procurement savings.
Reported operating profit for 2018 increased 100% versus 2017 due to the merger of the Linde Engineering business.
Other
| (Dollar amounts in millions) Year Ended December 31, | Variance | ||||||||||||||||
| 2019 | 2018 | 2017 | 2019 vs. 2018 | 2018 vs. 2017 | |||||||||||||
| Reported sales | $ | 1,954 | $ | 1,270 | $ | 1,063 | 54 | % | 19 | % | |||||||
| Pro forma sales | $ | 1,953 | $ | 1,812 | N/A | 8 | % | N/A | |||||||||
| Reported operating profit | $ | (245 | ) | $ | (37 | ) | $ | (4 | ) | (562 | )% | 825 | % | ||||
| As a percent of sales | (12.5 | )% | (2.9 | )% | |||||||||||||
| Pro forma operating profit | $ | (246 | ) | $ | (295 | ) | N/A | 17 | % | N/A | |||||||
| As a percent of sales | (12.6 | )% | (16.3 | )% | N/A |
| 2019 vs. 2018 | 2018 vs. 2017 | ||||||||
| % Change | % Change | ||||||||
| Reported | Pro forma | Reported | |||||||
| Factors Contributing to Changes | |||||||||
| Volume/Price | 9 | % | 12 | % | 8 | % | |||
| Currency | (2 | )% | (4 | )% | 2 | % | |||
| Acquisitions/Divestitures | 47 | % | — | % | 9 | % | |||
| 54 | % | 8 | % | 19 | % |
Other consists of corporate costs and a few smaller businesses including: Surface Technologies, GIST, global helium wholesale, and Electronic Materials; which individually do not meet the quantitative thresholds for separate presentation.
Sales
Reported sales for Other increased $684 million, or 54%, for the 2019 year versus the respective 2018 period, primarily due to the merger. On a pro forma basis, sales increased $141 million, or 8%, for 2019 versus the respective 2018 periods.
On a reported basis, sales increased 54% for the year, primarily due to the merger which increased sales by 47%. Higher volumes and price increased sales by 9% in the year, primarily driven by higher surface technologies volumes to the aerospace and manufacturing end-markets and higher price. Currency translation decreased sales by 2% for the year.
On a pro forma basis, sales increased 8% for 2019. Volume and price growth increased sales by 12%, driven by helium and surface technologies. Currency translation decreased sales by 4%.
Reported sales for 2018 increased $207 million, or 19%, versus 2017 driven primarily by the merger. Excluding the impact of the merger, underlying sales increased driven by surface technologies volumes to the aerospace and manufacturing end-markets and higher price.
Operating profit
Reported operating profit in Other decreased $208 million in 2019 versus the respective 2018 periods, due primarily to the merger. On a pro forma basis, operating loss improved $49 million, or 17%, when comparing 2019 to the 2018 period.
On a reported basis, operating profit decreased $208 million primarily related to the merger as operating profit increases from higher volumes and price were more than offset by the merger of Linde AG corporate.
On a pro forma basis, operating profit improved $49 million in the year. Higher volumes, helium pricing and cost reduction actions improved operating profit which was partially offset by higher helium sourcing costs.
Reported operating profit for 2018 decreased $33 million versus 2017 primarily related to the merger as operating profit increases from higher volumes and price were more than offset by the merger of Linde AG corporate.
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 2019 Consolidated Sales | Statements of Income | Balance Sheets | |||||||||||||||
| Average Year Ended December 31, | December 31, | ||||||||||||||||
| Currency | 2019 | 2018 | 2017 | 2019 | 2018 | ||||||||||||
| Euro | 20 | % | 0.89 | 0.85 | 0.89 | 0.89 | 0.87 | ||||||||||
| Chinese yuan | 7 | % | 6.90 | 6.60 | 6.76 | 6.96 | 6.88 | ||||||||||
| British pound | 6 | % | 0.78 | 0.75 | 0.78 | 0.75 | 0.78 | ||||||||||
| Australian dollar | 4 | % | 1.44 | 1.34 | N/A | 1.42 | 1.42 | ||||||||||
| Brazilian real | 4 | % | 3.94 | 3.63 | 3.19 | 4.03 | 3.87 | ||||||||||
| Korean won | 3 | % | 1,165 | 1,100 | 1,131 | 1,156 | 1,111 | ||||||||||
| Canadian dollar | 3 | % | 1.33 | 1.30 | 1.30 | 1.30 | 1.36 | ||||||||||
| Mexican peso | 2 | % | 19.24 | 19.20 | 18.86 | 18.93 | 19.65 | ||||||||||
| Taiwan dollar | 2 | % | 30.90 | 30.13 | 30.43 | 29.99 | 30.55 | ||||||||||
| Indian rupee | 2 | % | 70.40 | 68.00 | 65.00 | 71.38 | 69.77 | ||||||||||
| South African rand | 1 | % | 14.43 | 13.16 | N/A | 14.00 | 14.35 | ||||||||||
| Swedish kroner | 1 | % | 9.45 | 8.68 | 8.53 | 9.37 | 8.85 | ||||||||||
| Thailand bhat | 1 | % | 31.04 | 32.30 | 33.91 | 29.71 | 32.33 |
LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA
| (Millions of dollars) Year Ended December 31, | 2019 | 2018 | 2017 | ||||||||
| Net Cash Provided by (Used for) | |||||||||||
| Operating Activities | |||||||||||
| Income from continuing operations (including noncontrolling interests) | $ | 2,272 | $ | 4,288 | $ | 1,308 | |||||
| Non-cash charges (credits): | |||||||||||
| Add: Cost reduction programs and other charges, net of payments (a) | (236 | ) | 40 | 26 | |||||||
| Add: Amortization of merger-related inventory step-up | 12 | 368 | — | ||||||||
| Less: Net gain on sale of businesses, net of tax (b) | (108 | ) | (2,923 | ) | — | ||||||
| Add: Tax Act income tax charge, net | — | (61 | ) | 394 | |||||||
| Add: Depreciation and amortization | 4,675 | 1,830 | 1,184 | ||||||||
| Add (Less): Deferred income taxes, excluding Tax Act | (303 | ) | (187 | ) | 136 | ||||||
| Add (Less): non-cash charges and other | (32 | ) | 237 | 102 | |||||||
| Income from continuing operations adjusted for non-cash charges and other | 6,280 | 3,592 | 3,150 | ||||||||
| Less: Pension contributions | (94 | ) | (87 | ) | (19 | ) | |||||
| Add (Less): Working capital | (160 | ) | 202 | (158 | ) | ||||||
| Add (Less): Other | 93 | (53 | ) | 68 | |||||||
| Net cash provided by operating activities | $ | 6,119 | $ | 3,654 | $ | 3,041 | |||||
| Investing Activities | |||||||||||
| Capital expenditures | $ | (3,682 | ) | $ | (1,883 | ) | $ | (1,311 | ) | ||
| Acquisitions, net of cash acquired | (225 | ) | (25 | ) | (33 | ) | |||||
| Divestitures and asset sales, net of cash divested | 5,096 | 5,908 | 30 | ||||||||
| Cash acquired in merger transaction | — | 1,363 | — | ||||||||
| Net cash provided by (used for) investing activities | $ | 1,189 | $ | 5,363 | $ | (1,314 | ) | ||||
| Financing Activities | |||||||||||
| Debt increases (decreases) – net | $ | (1,260 | ) | $ | (2,908 | ) | $ | (771 | ) | ||
| Issuances (purchases) of ordinary shares – net | (2,586 | ) | (522 | ) | 108 | ||||||
| Cash dividends – Linde plc shareholders | (1,891 | ) | (1,166 | ) | (901 | ) | |||||
| Noncontrolling interest transactions and other | (3,260 | ) | (402 | ) | (92 | ) | |||||
| Net cash (used) for financing activities | $ | (8,997 | ) | $ | (4,998 | ) | $ | (1,656 | ) | ||
| Effect of exchange rate changes on cash | $ | (77 | ) | $ | (60 | ) | $ | 22 | |||
| Cash and cash equivalents, end-of-period | $ | 2,700 | $ | 4,466 | $ | 617 | |||||
| (a) | See Note 5 to the consolidated financial statements. |
| (b) | See Note 4 to the consolidated financial statements. |
Cash decreased $1,766 million in 2019 versus 2018. The primary sources of cash in 2019 were cash flows from operations of $6,119 million and proceeds from divestitures and asset sales of $5,096 million. The primary uses of cash included capital expenditures of $3,682 million, transactions with noncontrolling interests of $3,260 million, net purchases of ordinary shares of $2,586 million, cash dividends to shareholders of $1,891 million and net debt repayments of $1,260 million. Noncontrolling interest transactions and other of $3,260 million included a payment of approximately $3.2 billion related to the cash-merger squeeze-out of the 8% of Linde AG shares completed on April 8, 2019 (see Note 16 to the consolidated financial statements).
Cash Flows From Operations
2019 compared with 2018
Cash flows from operations was $6,119 million, or 22% of sales, an increase of $2,465 million from $3,654 million, or 25% of sales in 2018. The increase was primarily attributable to the merger which drove higher net income adjusted for non-cash charges, partially offset by higher working capital requirements and higher merger and synergy related cash outflows. 2019 included merger and synergy related cash outflows of $803 million, of which $567 million is included within "Net income (including noncontrolling interests)" and $236 million is included within "Cost reduction programs and other charges, net of payments".
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.
Investing
2019 compared with 2018
Net cash provided by investing activities of $1,189 million decreased $4,174 million from 2018 primarily driven by lower proceeds from merger-related divestitures, cash acquired in the merger and higher capital expenditures.
Capital expenditures in 2019 were $3,682 million, an increase of $1,799 million from 2018, driven primarily by the merger. Capital expenditures during 2019 related primarily to investments in new plant and production equipment for growth. Approximately 44% of the capital expenditures were in the Americas segment with 33% in the APAC segment and the rest primarily in the EMEA segment.
Acquisition expenditures in 2019 were $225 million, an increase of $200 million from 2018 and related primarily to acquisitions in the Americas.
Divestitures and asset sales in 2019 totaled $5,096 million primarily driven by proceeds from merger-related divestitures including $3.4 billion from the sale of Linde AG's Americas business, $1.2 billion from the sale of Linde Korea, and approximately $200 million each from the sale of the legacy Praxair and legacy Linde India selected assets (see Note 4 to the consolidated financial statements). 2018 divestiture and asset sale cash flows included $5.6 billion 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).
2018 compared with 2017
Net cash 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 2019 related primarily to investments in new plant and production equipment for growth and density.
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 $5.6 billion 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).
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 intercompany 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 for financing activities was $8,997 million in 2019 compared to $4,998 million in 2018. The primary financing uses of cash were for transactions with noncontrolling interests, net debt repayments, cash dividends and net purchases of Linde ordinary shares. Noncontrolling interest transactions and other payments of $3,260 million increased $2,858 million from 2018 driven by a payment of approximately $3.2 billion for the cash-merger squeeze-out of the 8% of Linde AG shares completed on April 8, 2019 (see Note 16 to the consolidated financial statements). 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. Cash dividends of $1,891 million increased $725 million from 2018 driven primarily by higher shares outstanding after the merger and a 6% increase in dividends per share from $3.30 to $3.50. Net purchases of ordinary shares were $2,586 million in 2019 versus $522 million in 2018 driven by increased share repurchases. The cash used for debt repayments-net of $1,260 million decreased $1,648 million from $2,908 million during 2018 while cash decreased $1,766 million. Net debt (calculated as total debt less cash and cash equivalents) increased $426 million primarily due to lower cash balances partially offset by debt repayments.
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. At December 31, 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 2019, 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, 2019 and expects to remain in compliance for the foreseeable future.
Linde’s total net debt outstanding at December 31, 2019 was $11,256 million, $426 million higher than $10,830 million at December 31, 2018. The December 31, 2019 net debt balance includes $12,752 million in public securities, $1,204 million representing primarily worldwide bank borrowings, net of $2,700 million of cash. Linde’s global effective borrowing rate was approximately 2% for 2019.
In February 2019, Linde repaid $500 million of 1.90% rate notes that became due; in May 2019 Linde repaid $150 million of variable rate notes that became due; in June 2019 Linde repaid €500 million of 1.75% notes that due and AUD100 million of variable rate notes that became due; in August 2019 Linde repaid $200 million of variable rate notes that became due.
On March 26, 2019 the company and certain of its subsidiaries entered into an unsecured revolving credit agreement ("the Credit Agreement") with a syndicate of banking institutions, which became effective on March 29, 2019. The Credit Agreement provides for total commitments of $5.0 billion, which may be increased up to $6.5 billion, subject to receipt of additional commitments and satisfaction of customary conditions. There are no financial maintenance covenants contained within the Credit Agreement. The revolving credit facility expires on March 26, 2024 with the option to request two one-year extensions of the expiration date. In connection with the effectiveness of the Credit Agreement, Praxair and Linde AG terminated their respective existing revolving credit facilities. No borrowings were outstanding under the Credit Agreement as of December 31, 2019.
On September 3, 2019, Linde and the company’s subsidiaries Praxair and Linde AG entered into a series of parent and subsidiary guarantees related to currently outstanding notes issued by Praxair and Linde AG as well as the $5 billion Credit Agreement.
On December 10, 2018, the company announced a $1.0 billion share repurchase program, which 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, of which $2.3 billion had been repurchased through December 31, 2019. 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, 2019:
| (Millions of dollars) | Due or expiring by December 31, | ||||||||||||||||||||||||||
| 2020 | 2021 | 2022 | 2023 | 2024 | Thereafter | Total | |||||||||||||||||||||
| Long-term debt obligations: | |||||||||||||||||||||||||||
| Debt and capitalized lease maturities (Note 13) | $ | 1,531 | $ | 1,855 | $ | 2,330 | $ | 1,798 | $ | 983 | $ | 3,727 | $ | 12,224 | |||||||||||||
| Contractual interest | 297 | 237 | 175 | 146 | 98 | 585 | 1,538 | ||||||||||||||||||||
| Operating leases (Note 6) | 275 | 208 | 163 | 110 | 75 | 251 | 1,082 | ||||||||||||||||||||
| Retirement obligations | 101 | 36 | 37 | 37 | 36 | 183 | 430 | ||||||||||||||||||||
| Unconditional purchase obligations | 833 | 769 | 718 | 660 | 650 | 2,877 | 6,507 | ||||||||||||||||||||
| Construction commitments | 2,234 | 871 | 291 | 25 | — | — | 3,421 | ||||||||||||||||||||
| Total Contractual Obligations | $ | 5,271 | $ | 3,976 | $ | 3,714 | $ | 2,776 | $ | 1,842 | $ | 7,623 | $ | 25,202 |
Contractual interest on long-term debt of $1,538 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, 2019, Linde had fixed-rate debt of $10,799 million and floating-rate debt of $3,157 million. The rate assumed for floating-rate debt was the rate in effect at December 31, 2019.
Retirement obligations of $430 million include estimates of pension plan contributions and expected future benefit payments for unfunded pension and OPEB plans. Pension plan contributions are forecasted for 2020 only. For purposes of the table, $60 million of estimated contributions have been included for 2020. Expected future unfunded pension and OPEB benefit payments are forecasted only through 2029. Contribution and unfunded benefit payment estimates are based upon current valuation assumptions. Estimates of pension contributions after 2020 and unfunded benefit payments after 2029 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 $6,507 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 $2,983 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 $3,421 million represent outstanding commitments to complete authorized construction projects as of December 31, 2019. 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 $415 million, including interest and penalties, are not included in the table because the timing of their resolution cannot be estimated. Tax liabilities for deemed repatriation of earnings of $261 million are payable over the next six years. See Note 7 to the consolidated financial statements for disclosures surrounding the "Tax Act" and uncertain income tax positions.
OFF-BALANCE SHEET ARRANGEMENTS
As discussed in Note 19 to the consolidated financial statements, at December 31, 2019, 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
Linde AG’s assets and liabilities were measured at fair value as of the date of the merger. 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 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. As of the end of 2019, the valuation process to determine the fair value of the acquired assets and liabilities is complete.
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, 2019 was $29,064 million, representing 34% of the company’s consolidated total assets. Depreciation expense for the year ended December 31, 2019 was $3,940 million, or 16% of total operating costs. 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, 2019, if depreciable lives of machinery and equipment, on average, were increased or decreased by one year, annual depreciation expense would be decreased by approximately $471 million or increased by approximately $618 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, 2019 was $16,137 million, representing 19% of the company’s consolidated total assets, including $1,870 million of indefinite-lived intangibles. Amortization expense related to finite-lived intangible assets for the year ended December 31, 2019 was $735 million, or 3% of total operating costs. 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, 2019, if amortization lives of other intangible assets, on average, were increased or decreased by one year, annual amortization expense would be decreased by approximately $33 million or increased by approximately $36 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., divestiture-related settlement charges, settlement charges resulting from change in control provisions, etc.).
The weighted-average expected long-term rates of return on pension plan assets were 7.27% for U.S. plans and 5.15% for international plans for the year ended December 31, 2019 (7.62% and 5.13%, respectively at December 31, 2018). 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 $44 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 $8,778 million, or $158 million lower than the fair value of assets of $8,936 million at December 31, 2019. These net deferred investment losses of $158 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. The company measures the service and interest cost components of pension and OPEB expense for significant U.S. and international plans using the spot rate 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 2019 benefit costs. A 0.50% reduction in discount rates, with all other variables held constant, would increase Linde’s pension expense by approximately $29 million whereas a 0.50% increase in discount rates would result in a decrease of $25 million. A 0.50% reduction in discount rates would increase the PBO by approximately $976 million whereas a 0.50% increase in discount rates would have a favorable impact to the PBO of approximately $855 million.
The weighted-average expected rate of compensation increase was 3.25% for U.S. plans and 2.46% for international plans at December 31, 2019 (3.25% and 2.38%, respectively, at December 31, 2018). 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 $65 million.
Asset Impairments
Goodwill and Other Indefinite-Lived Intangibles Assets
At December 31, 2019, the company had goodwill of $27,019 million and $1,870 million of other indefinite-lived intangible assets. 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 or more frequently if events or circumstances indicate that an impairment loss may have been incurred. During the fourth quarter of fiscal year 2019, the company changed the date of its annual goodwill impairment test from April 30 to October 1. The change was made to more closely align the impairment testing date with the company’s planning process. The change in annual impairment testing date did not delay, accelerate or avoid an impairment charge. The company has determined this change in the method of applying an accounting principle is preferable.
The impairment tests performed during the second and fourth quarters of 2019 indicated no impairment. At December 31, 2019, Linde’s enterprise value was approximately $125 billion (outstanding shares multiplied by the year-end stock price plus net debt, and without any control premium) while its total capital was approximately $63 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. In estimating the fair value of each reporting unit, management applied a multiple of earnings from a peer group to the company’s forecasted earnings for the year ending December 31, 2019. The peer group is comprised of comparable entities with similar operations and economic characteristics.
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 quantitative and qualitative factors used to perform its annual goodwill impairment assessment are appropriate and reasonable. Although the 2019 assessment indicated that it is more likely than not that the fair value of each reporting unit 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. Reporting units with greater concentration of Linde AG assets fair valued during the recent merger are at greater risk of impairment in future periods.
Other indefinite-lived intangible assets from Linde AG recently fair valued 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, 2019, Linde had deferred tax assets of $2,179 million (net of valuation allowances of $222 million), and deferred tax liabilities of $8,825 million. At December 31, 2019, uncertain tax positions totaled $472 million (see Notes 2 and 7 to the consolidated financial statements). Income tax expense was $769 million for the year ended December 31, 2019, or about 26.3% 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.
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 or realizable. 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.
SUPPLEMENTAL PRO FORMA INCOME STATEMENT INFORMATION
To assist with a discussion of the 2019 and 2018 results on a comparable basis, certain supplemental unaudited pro forma income statement information is provided on both a consolidated and segment basis (referred to as "pro forma Income Statement Information" or "pro forma information").
The pro forma information has been prepared on a basis consistent with Article 11 of Regulation S-X, assuming the merger and the merger-related divestitures had been consummated on January 1, 2018 and includes adjustments for (1) the preliminary purchase accounting impacts of the merger, including increased amortization expense on acquired intangible assets, increased depreciation on property, plant and equipment and lower interest expense due to revaluing existing debt to fair value, (2) conversion to US GAAP from IFRS for Linde AG, (3) accounting policy alignment, (4) the elimination of the impact of transactions between Praxair and Linde AG, (5) the elimination of the effect of events that are directly attributable to the Merger Agreement and (6) the elimination of the effect of consummated and probable divestitures required as a condition of the approval for the merger. In preparing this pro forma information, the historical financial information has been adjusted to give effect to pro forma Adjustments that are (i) directly attributable to the business combination and other transactions presented herein, such as the merger-related divestitures, (ii) factually supportable, and (iii) expected to have a continuing impact on the combined entity’s consolidated results.
The pro forma information is based on management's assumptions and is presented for illustrative purposes and does not purport to represent what the results of operations would actually have been if the merger and merger-related divestitures had occurred as of the dates indicated or what the results would be for any future periods. Also, the pro forma information does not include the impact of any revenue, cost or other operating synergies that may result from the merger or any related restructuring costs. Events that are not expected to have a continuing impact on the combined results (e.g. inventory step-up costs, non-recurring income/charges) are excluded from the unaudited pro forma information.
The unaudited pro forma income statement has been presented for informational purposes only and is not necessarily indicative of what Linde's results of operation actually would have been had the merger been completed on January 1, 2018. In addition, the unaudited pro forma income statement does not purport to project the future operating results of the company.
The pro forma Income Statement Information are included in the following schedules:
- Year ended December 31, 2019 pro forma Income Statement Information
- Year ended December 31, 2018 pro forma Income Statement Information
Refer to an earlier section in this MD&A titled "Merger of Praxair, Inc. and Linde AG".
YEAR TO DATE DECEMBER 31, 2019 PRO FORMA INCOME STATEMENT INFORMATION
(Millions of dollars, except per share data)
(UNAUDITED)
| Pro forma Adjustments | ||||||||||||||||
| Linde plc Reported | Divestitures (a) | Other | Total | Pro Forma | ||||||||||||
| Sales | $ | 28,228 | $ | (65 | ) | $ | — | $ | (65 | ) | $ | 28,163 | ||||
| Cost of sales, exclusive of depreciation | 16,644 | (48 | ) | (12 | ) | (b) | (60 | ) | 16,584 | |||||||
| Selling, general and administrative | 3,457 | (1 | ) | (1 | ) | 3,456 | ||||||||||
| As a % of Sales | 12.2 | % | 12.3 | % | ||||||||||||
| Depreciation and amortization | 4,675 | — | 4,675 | |||||||||||||
| Research and development | 184 | — | 184 | |||||||||||||
| Cost reduction programs and other charges | 567 | (190 | ) | (c) | (190 | ) | 377 | |||||||||
| Net gain on sale of businesses | 164 | (164 | ) | (d) | (164 | ) | — | |||||||||
| Other income (expense) - net | 68 | — | 68 | |||||||||||||
| Operating profit | 2,933 | (16 | ) | 38 | 22 | 2,955 | ||||||||||
| Operating margin | 10.4 | % | 10.5 | % | ||||||||||||
| Net pension and OPEB cost (benefit), excluding service costs | (32 | ) | (97 | ) | (e) | (97 | ) | (129 | ) | |||||||
| Interest expense - net | 38 | — | 38 | |||||||||||||
| Income taxes | 769 | (5 | ) | (15 | ) | (f) | (20 | ) | 749 | |||||||
| Effective Tax Rate | 26.3 | % | 24.6 | % | ||||||||||||
| Income from equity investments | 114 | — | 114 | |||||||||||||
| Noncontrolling interests from continuing operations | (89 | ) | — | (89 | ) | |||||||||||
| Income from continuing operations | $ | 2,183 | $ | (11 | ) | $ | 150 | $ | 139 | $ | 2,322 | |||||
| Diluted shares outstanding | 545,170 | 545,170 | 545,170 | |||||||||||||
| Diluted EPS from continuing operations | $ | 4.00 | $ | 0.25 | $ | 4.25 | ||||||||||
| SEGMENT SALES | ||||||||||||||||
| Americas | $ | 10,993 | $ | (4 | ) | $ | — | $ | (4 | ) | $ | 10,989 | ||||
| EMEA | 6,643 | — | 6,643 | |||||||||||||
| APAC | 5,839 | (60 | ) | (60 | ) | 5,779 | ||||||||||
| Engineering | 2,799 | — | 2,799 | |||||||||||||
| Other | 1,954 | (1 | ) | (1 | ) | 1,953 | ||||||||||
| Segment sales | $ | 28,228 | $ | (65 | ) | $ | — | $ | (65 | ) | $ | 28,163 | ||||
| SEGMENT OPERATING PROFIT | ||||||||||||||||
| Americas | $ | 2,578 | $ | (1 | ) | $ | — | $ | (1 | ) | $ | 2,577 | ||||
| EMEA | 1,367 | 1,367 | ||||||||||||||
| APAC | 1,198 | (14 | ) | (14 | ) | 1,184 | ||||||||||
| Engineering | 390 | 390 | ||||||||||||||
| Other | (245 | ) | (1 | ) | (1 | ) | (246 | ) | ||||||||
| Segment operating profit | 5,288 | (16 | ) | — | (16 | ) | 5,272 | |||||||||
| Cost reduction programs and other charges | (567 | ) | — | (567 | ) | |||||||||||
| Net gain on sale of businesses | 164 | — | 164 | |||||||||||||
| Purchase accounting impacts - Linde AG | (1,952 | ) | — | (1,952 | ) | |||||||||||
| Total operating profit | $ | 2,933 | $ | (16 | ) | $ | — | $ | (16 | ) | $ | 2,917 |
| 2019 Pro forma adjustments | ||
| (a) | To eliminate the results of Praxair's merger-related divestitures. | |
| (b) | To eliminate the impact of the inventory step-up recorded in purchase accounting for the merger. This item is nonrecurring in nature, directly attributable to the merger and occurred within one year of the transaction. | |
| (c) | To eliminate the transaction costs and other charges related to the merger. These transaction costs are nonrecurring, directly attributable to the merger, and incremental. See Note 5 to the consolidated financial statements. | |
| (d) | To eliminate the gain on merger related divestitures. | |
| (e) | To eliminate pension settlement charges related to the merger. | |
| (f) | To eliminate the income tax impacts of Other adjustments. |
YEAR TO DATE DECEMBER 31, 2018 PRO FORMA INCOME STATEMENT INFORMATION
(Millions of dollars, except per share data)
(UNAUDITED)
| Pro forma Adjustments | |||||||||||||||||||||||
| Linde plc (a) | Linde AG (b) | Divestitures (c) | Purchase Accounting (d) | Other | Total | Pro Forma Linde plc | |||||||||||||||||
| Sales | $ | 14,836 | $ | 16,929 | $ | (3,598 | ) | $ | — | $ | (83 | ) | (e) | $ | 13,248 | $ | 28,084 | ||||||
| Cost of sales, exclusive of depreciation | 9,020 | 10,515 | (2,155 | ) | — | (451 | ) | (e) | 7,909 | 16,929 | |||||||||||||
| Selling, general and administrative | 1,629 | 2,370 | (364 | ) | — | — | 2,006 | 3,635 | |||||||||||||||
| As a % of Sales | 11.0 | % | 12.9 | % | |||||||||||||||||||
| Depreciation and amortization | 1,830 | 1,570 | (337 | ) | 1,861 | — | 3,094 | 4,924 | |||||||||||||||
| Research and development | 113 | 88 | — | — | — | 88 | 201 | ||||||||||||||||
| Cost reduction programs and other charges | 309 | 323 | — | — | (576 | ) | (f) | (253 | ) | 56 | |||||||||||||
| Other income (expense) - net | 3,312 | 204 | — | — | (3,294 | ) | (j) | (3,090 | ) | 222 | |||||||||||||
| Operating profit | 5,247 | 2,267 | (742 | ) | (1,861 | ) | (2,350 | ) | (2,686 | ) | 2,561 | ||||||||||||
| Operating margin | 35.4 | % | 9.1 | % | |||||||||||||||||||
| Net pension and OPEB cost (benefit), excluding service costs | (4 | ) | (159 | ) | (2 | ) | — | — | (161 | ) | (165 | ) | |||||||||||
| Interest expense - net | 202 | 332 | (72 | ) | (83 | ) | — | 177 | 379 | ||||||||||||||
| Income taxes | 817 | 634 | (87 | ) | (430 | ) | (264 | ) | (g) | (147 | ) | 670 | |||||||||||
| Effective Tax Rate | 16.2 | % | 28.5 | % | |||||||||||||||||||
| Income from equity investments | 56 | 80 | (31 | ) | (53 | ) | — | (4 | ) | 52 | |||||||||||||
| Noncontrolling interests from continuing operations | (15 | ) | (144 | ) | 19 | 140 | — | 15 | — | ||||||||||||||
| Income from continuing operations | $ | 4,273 | $ | 1,396 | $ | (593 | ) | $ | (1,261 | ) | $ | (2,086 | ) | $ | (2,544 | ) | $ | 1,729 | |||||
| Diluted shares outstanding | 334,127 | 221,024 | (h) | 555,151 | |||||||||||||||||||
| Diluted EPS from continuing operations | $ | 12.79 | $ | (9.68 | ) | (h) | $ | 3.11 | |||||||||||||||
| SEGMENT SALES | |||||||||||||||||||||||
| Americas | $ | 8,017 | $ | 4,352 | $ | (1,768 | ) | $ | (62 | ) | (e) | $ | 2,522 | $ | 10,539 | ||||||||
| EMEA | 2,644 | 5,809 | (1,463 | ) | 1 | (e) | 4,347 | 6,991 | |||||||||||||||
| APAC | 2,446 | 3,851 | (329 | ) | (18 | ) | (e) | 3,504 | 5,950 | ||||||||||||||
| Engineering | 459 | 2,333 | — | — | (e) | 2,333 | 2,792 | ||||||||||||||||
| Other | 1,270 | 584 | (38 | ) | (4 | ) | (e) | 542 | 1,812 | ||||||||||||||
| Segment sales | $ | 14,836 | $ | 16,929 | $ | (3,598 | ) | $ | — | $ | (83 | ) | $ | 13,248 | $ | 28,084 | |||||||
| SEGMENT OPERATING PROFIT | |||||||||||||||||||||||
| Americas | $ | 2,053 | $ | 714 | $ | (327 | ) | $ | (7 | ) | (i) | $ | 380 | $ | 2,433 | ||||||||
| EMEA | 481 | 1,230 | (324 | ) | (43 | ) | (i) | 863 | 1,344 | ||||||||||||||
| APAC | 465 | 686 | (82 | ) | (40 | ) | (i) | 564 | 1,029 | ||||||||||||||
| Engineering | 14 | 276 | — | (5 | ) | (i) | 271 | 285 | |||||||||||||||
| Other | (37 | ) | (316 | ) | (9 | ) | 67 | (i) | (258 | ) | (295 | ) | |||||||||||
| Segment operating profit | 2,976 | 2,590 | (742 | ) | (28 | ) | 1,820 | 4,796 | |||||||||||||||
| Cost reduction programs and other charges | (309 | ) | (323 | ) | 632 | 309 | — | ||||||||||||||||
| Gain on sale of businesses | 3,294 | (3,294 | ) | (3,294 | ) | — | |||||||||||||||||
| Purchase accounting impacts - Linde AG | (714 | ) | 714 | 714 | — | ||||||||||||||||||
| Total operating profit | $ | 5,247 | $ | 2,267 | $ | (742 | ) | $ | (1,976 | ) | $ | (451 | ) | $ | 4,796 |
| 2018 Pro forma adjustments | |||||||||
| (a) To include Linde plc consolidated results for the year ended December 31, 2018. Note that the results include the performance of Praxair's European industrial gases business through December 3, 2018 and the results of Linde AG from October 31, 2018 (merger date) through December 31, 2018. The adjustments reflect reclassifications to conform to Linde plc's reporting format. | |||||||||
| (b) To include Linde AG consolidated results for the period prior to the merger date at October 31, 2018. The adjustments reflect reclassifications to conform to Linde plc's reporting format and adjustments from IFRS to U.S. GAAP. | |||||||||
| (c) To eliminate the results of merger-related divestitures required by regulatory authorities to secure approval for the Merger. These divestitures include the majority of Praxair's European industrial gases business (completed December 3, 2018), a significant portion of Linde AG's America's industrial gases business (completed on March 1, 2019), select assets of Linde AG's South Korean industrial gases business (completed April 30, 2019), as well as certain divestitures of other Praxair and Linde AG businesses in Asia. | |||||||||
| (d) To include purchase accounting adjustments for the period from January 1, 2018 to October 30, 2018 (prior to the Merger). This relates to (i) additional depreciation and amortization related to the increased value of of property, plant and equipment and increased basis of intangible assets, (ii) interest expense impacts related to the fair value of debt, (iii) the tax impacts related to the non-GAAP adjustments above, (iv) income from equity investments equity related to the fair value of equity investments, and (v) noncontrolling interests adjustments related to the fair value adjustments above. Purchase accounting impacts are not included in the definition of segment operating profit; therefore, no pro forma adjustment is required for segment reporting. | |||||||||
| (e) To eliminate sales between Praxair and Linde AG for the period prior to the Merger date at October 31, 2018 (January 1, 2018 to October 30, 2018). (e) also includes a $368 million impact for the fair value step-up of inventories acquired in the merger. This charge is recorded in cost of sales and subsequently eliminated. | |||||||||
| (f) To eliminate the transaction costs and other charges related to the Merger. | |||||||||
| (g) To reflect the income tax impact of the above pro forma adjustments. | |||||||||
| (h) To reflect the impact on diluted shares outstanding and diluted EPS related to ordinary shares issues to Linde AG shareholders in connection with the Merger. | |||||||||
| (i) To eliminate other (income) charges not included in segment operating profit, primarily related to a gain on a sale of business in EMEA and a gain on a sale of asset in APAC. | |||||||||
| (j) To eliminate the gain on merger related divestitures. |
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 2019, 2018, and 2017 have been included for reference purposes and to facilitate the calculations contained herein.
| (Dollar amounts in millions, except per share data) | 2019 | 2018 | 2017 | |||||||||
| Year Ended December 31, | ||||||||||||
| Adjusted Pro Forma Operating Profit and Margin | ||||||||||||
| Reported operating profit | $ | 2,933 | $ | 5,247 | $ | 2,444 | ||||||
| Pro forma adjustments (a) | 22 | (2,686 | ) | N/A | ||||||||
| Pro forma | 2,955 | 2,561 | N/A | |||||||||
| Non-GAAP Adjustments: | ||||||||||||
| Add: Cost reduction programs and other charges | 377 | 53 | 52 | |||||||||
| Less: Net gain on sale of businesses | — | (51 | ) | — | ||||||||
| Add: Purchase accounting impacts - Linde AG (d) | 1,940 | 2,233 | — | |||||||||
| Total adjustments | 2,317 | 2,235 | 52 | |||||||||
| Adjusted pro forma operating profit | $ | 5,272 | $ | 4,796 | N/A |
| Adjusted operating profit | $ | 2,496 | ||||||||||
| Reported percent change | (44.1 | )% | 114.7 | % | ||||||||
| Adjusted pro forma percent change | 9.9 | % | N/A | |||||||||
| Reported sales | $ | 28,228 | $ | 14,836 | $ | 11,358 | ||||||
| Pro forma sales (a) | 28,163 | 28,084 | N/A | |||||||||
| Reported operating margin | 10.4 | % | 35.4 | % | 21.5 | % | ||||||
| Pro forma operating margin | 10.5 | % | 9.1 | % | N/A | |||||||
| Adjusted pro forma operating margin | 18.7 | % | 17.1 | % | N/A | |||||||
| Adjusted Pro Forma Depreciation and amortization | ||||||||||||
| Reported depreciation and amortization | $ | 4,675 | $ | 1,830 | $ | 1,184 | ||||||
| Pro forma adjustments (a) | — | 3,094 | N/A | |||||||||
| Pro forma | 4,675 | 4,924 | N/A | |||||||||
| Non-GAAP Adjustments: | ||||||||||||
| Less: Purchase accounting impacts - Linde AG (d) | (1,940 | ) | (2,233 | ) | — | |||||||
| Adjusted pro forma depreciation and amortization | $ | 2,735 | $ | 2,691 | N/A | |||||||
| Adjusted depreciation and amortization | $ | 1,184 | ||||||||||
| Adjusted Pro Forma Net pension and OPEB cost (benefit), excluding service cost | ||||||||||||
| Reported net pension and OPEB cost (benefit), excluding service cost | $ | (32 | ) | $ | (4 | ) | $ | (4 | ) | |||
| Pro forma adjustments (a) | (97 | ) | (161 | ) | N/A | |||||||
| Pro forma | (129 | ) | (165 | ) | N/A | |||||||
| Non-GAAP Adjustments: | ||||||||||||
| Add: Pension plan reorganization charge - net | (10 | ) | (14 | ) | (2 | ) | ||||||
| Total adjustments | (10 | ) | (14 | ) | (2 | ) | ||||||
| Adjusted pro forma Net Pension and OPEB cost (benefit), excluding service costs | $ | (139 | ) | $ | (179 | ) | N/A | |||||
| Adjusted Net Pension and OPEB cost (benefit), excluding service costs | $ | (6 | ) | |||||||||
| Adjusted Pro Forma Interest Expense - Net | ||||||||||||
| Reported interest expense - net | $ | 38 | $ | 202 | $ | 161 | ||||||
| Pro forma adjustments (a) | — | 177 | N/A | |||||||||
| Pro forma | 38 | 379 | N/A | |||||||||
| Non-GAAP Adjustments: | ||||||||||||
| Less: Bond redemption | — | (26 | ) | — | ||||||||
| Less: Loss on hedge portfolio unwind | — | (174 | ) | — | ||||||||
| Add: Purchase accounting impacts - Linde AG (d) | 96 | 100 | — | |||||||||
| Total adjustments | 96 | (100 | ) | — | ||||||||
| Adjusted pro forma interest expense - net | $ | 134 | $ | 279 | N/A | |||||||
| Adjusted interest expense - net | $ | 161 | ||||||||||
| Adjusted Pro Forma Income Taxes(b) | ||||||||||||
| Reported income taxes | $ | 769 | $ | 817 | $ | 1,026 | ||||||
| Pro forma adjustments (a) | (20 | ) | (147 | ) | N/A | |||||||
| Pro forma | 749 | 670 | N/A | |||||||||
| Non-GAAP Adjustments: |
| Add: Bond redemption | — | 6 | — | |||||||||
| Add: Pension settlement charge | — | 3 | 1 | |||||||||
| Add: Purchase accounting impacts - Linde AG (d) | 447 | 516 | — | |||||||||
| Add: Cost reduction programs and other charges | 71 | (1 | ) | 4 | ||||||||
| Add: Tax reform | — | 17 | (394 | ) | ||||||||
| Total adjustments | 518 | 541 | (389 | ) | ||||||||
| Adjusted pro forma income taxes | $ | 1,267 | $ | 1,211 | N/A | |||||||
| Adjusted income taxes | $ | 637 | ||||||||||
| Adjusted Pro Forma Effective Tax Rate (b) | ||||||||||||
| Reported income before income taxes and equity investments | $ | 2,927 | $ | 5,049 | $ | 2,287 | ||||||
| Pro forma adjustments (a) | 119 | (2,702 | ) | N/A | ||||||||
| Pro forma | 3,046 | 2,347 | N/A | |||||||||
| Non-GAAP Adjustments: | ||||||||||||
| Add: Bond redemption | — | 26 | — | |||||||||
| Add: Pension settlement charge | — | 14 | 2 | |||||||||
| Add: Purchase accounting impacts - Linde AG (d) | 1,844 | 2,133 | — | |||||||||
| Add: Cost reduction programs and other charges | 377 | 53 | 52 | |||||||||
| Add: Pension plan reorganization charge - net | 10 | — | — | |||||||||
| Add: Loss on hedge portfolio unwind | — | 174 | — | |||||||||
| Less: Net gain on sale of businesses | — | (51 | ) | — | ||||||||
| Total adjustments | 2,231 | 2,349 | 54 | |||||||||
| Adjusted pro forma income before income taxes and equity investments | $ | 5,277 | $ | 4,696 | N/A | |||||||
| Adjusted income before income taxes and equity investments | $ | 2,341 | ||||||||||
| Reported income taxes | $ | 769 | $ | 817 | $ | 1,026 | ||||||
| Reported effective tax rate | 26.3 | % | 16.2 | % | 44.9 | % | ||||||
| Adjusted pro forma income taxes | $ | 1,267 | $ | 1,211 | N/A | |||||||
| Adjusted income taxes | $ | 637 | ||||||||||
| Adjusted pro forma effective tax rate | 24.0 | % | 25.8 | % | N/A | |||||||
| Adjusted effective tax rate | 27.2 | % | ||||||||||
| Income from Equity Investments | ||||||||||||
| Reported income from equity investments | $ | 114 | $ | 56 | $ | 47 | ||||||
| Pro forma adjustments (a) | — | (4 | ) | N/A | ||||||||
| Pro forma | 114 | 52 | N/A | |||||||||
| Non-GAAP Adjustments: | ||||||||||||
| Add: Purchase accounting impacts - Linde AG (d) | 57 | 64 | — | |||||||||
| Total adjustments | 57 | 64 | — | |||||||||
| Adjusted pro forma income from equity investments | $ | 171 | $ | 116 | N/A | |||||||
| Adjusted income from equity investments | $ | 47 | ||||||||||
| Adjusted Noncontrolling Interests from Continuing Operations | ||||||||||||
| Reported noncontrolling interests from continuing operations | $ | (89 | ) | $ | (15 | ) | $ | (61 | ) | |||
| Pro forma adjustments (a) | — | 15 | N/A | |||||||||
| Pro forma | (89 | ) | — | N/A | ||||||||
| Non-GAAP adjustments: | ||||||||||||
| Add: Cost reduction programs and other charges | (35 | ) | — | — |
| Add: Purchase accounting impacts - Linde AG (d) | (54 | ) | (168 | ) | — | |||||||
| Total adjustments | (89 | ) | (168 | ) | — | |||||||
| Adjusted pro forma noncontrolling interests from continuing operations | $ | (178 | ) | $ | (168 | ) | N/A | |||||
| Adjusted noncontrolling interests from continuing | $ | (61 | ) | |||||||||
| Adjusted Income from Continuing Operations (c) | ||||||||||||
| Reported income from continuing operations | $ | 2,183 | $ | 4,273 | $ | 1,247 | ||||||
| Pro forma adjustments (a) | 139 | (2,544 | ) | N/A | ||||||||
| Pro forma | 2,322 | 1,729 | N/A | |||||||||
| Non-GAAP adjustments: | ||||||||||||
| Add: Pension settlement charge | — | 11 | 1 | |||||||||
| Add: Cost reduction programs and other charges | 281 | 53 | 48 | |||||||||
| Less: Net gain on sale of business | — | (50 | ) | — | ||||||||
| Add: Bond Redemption | — | 20 | — | |||||||||
| Add: Loss on hedge portfolio unwind | — | 174 | — | |||||||||
| Less: Other tax charges | — | (17 | ) | 394 | ||||||||
| Add: Purchase accounting impacts - Linde AG | 1,400 | 1,513 | — | |||||||||
| Total adjustments | 1,681 | 1,704 | 443 | |||||||||
| Adjusted pro forma income from continuing operations | $ | 4,003 | $ | 3,433 | N/A | |||||||
| Adjusted income from continuing operations | $ | 1,690 | ||||||||||
| Adjusted Pro Forma Diluted EPS from Continuing Operations (c) | ||||||||||||
| Reported diluted EPS from continuing operations | $ | 4.00 | $ | 12.79 | $ | 4.32 | ||||||
| Pro forma adjustments (a) | 0.25 | (9.68 | ) | N/A | ||||||||
| Pro forma | 4.25 | 3.11 | N/A | |||||||||
| Non-GAAP adjustments: | ||||||||||||
| Add: Pension settlement charge | — | 0.03 | — | |||||||||
| Add: Cost reduction programs and other charges | 0.52 | 0.09 | 0.17 | |||||||||
| Less: Net gain on sale of business | — | (0.09 | ) | — | ||||||||
| Add: Bond redemption | — | 0.04 | — | |||||||||
| Add: Loss on hedge portfolio unwind | — | 0.31 | — | |||||||||
| Less Income tax reform | — | (0.03 | ) | 1.36 | ||||||||
| Add: Purchase accounting impacts - Linde AG | 2.57 | 2.73 | — | |||||||||
| Total adjustments | 3.09 | 3.08 | 1.53 | |||||||||
| Adjusted pro forma diluted EPS from continuing operations | $ | 7.34 | $ | 6.19 | N/A | |||||||
| Adjusted diluted EPS from continuing operations | $ | 5.85 | ||||||||||
| Adjusted Pro Forma EBITDA and % of Sales | ||||||||||||
| Income from continuing operations | $ | 2,183 | $ | 4,273 | $ | 1,247 | ||||||
| Add: Noncontrolling interests related to continuing operations | 89 | 15 | 61 | |||||||||
| Add: Net pension and OPEB cost (benefit), excluding service cost | (32 | ) | (4 | ) | (4 | ) | ||||||
| Add: Interest expense | 38 | 202 | 161 | |||||||||
| Add: Income taxes | 769 | 817 | 1,026 | |||||||||
| Add: Depreciation and amortization | 4,675 | 1,830 | 1,184 | |||||||||
| EBITDA from continuing operations | 7,722 | 7,133 | 3,675 | |||||||||
| Pro forma adjustments (a) | ||||||||||||
| Add: Linde AG consolidated results | — | 3,917 | N/A | |||||||||
| Add: Purchase accounting impacts - Linde AG | 12 | 315 | N/A |
| Add: Cost reduction programs and other charges | 190 | 576 | N/A | |||||||||
| Less: Net gain on sale of businesses | (164 | ) | (3,294 | ) | N/A | |||||||
| Less: Divestitures | (16 | ) | (1,110 | ) | N/A | |||||||
| Pro forma adjustments | 22 | 404 | N/A | |||||||||
| Pro forma EBITDA from continuing operations | 7,744 | 7,537 | N/A | |||||||||
| Non-GAAP adjustments: | ||||||||||||
| Less: Net gain on sale of business | — | (51 | ) | — | ||||||||
| Add: Cost reduction programs and other charges | 377 | 53 | 52 | |||||||||
| Add: Purchase accounting impacts - Linde AG | 57 | 64 | — | |||||||||
| Total adjustments | 434 | 66 | 52 | |||||||||
| Adjusted pro forma EBITDA from continuing operations | $ | 8,178 | $ | 7,603 | N/A | |||||||
| Adjusted EBITDA from continuing operations | $ | 3,727 | ||||||||||
| Reported sales | $ | 28,228 | $ | 14,836 | $ | 11,358 | ||||||
| Pro forma sales | $ | 28,163 | $ | 28,084 | N/A | |||||||
| % of sales | ||||||||||||
| EBITDA from continuing operations | 27.4 | % | 48.1 | % | 32.4 | % | ||||||
| Pro forma EBITDA from continuing operations | 27.5 | % | 26.8 | % | N/A | |||||||
| Adjusted pro forma EBITDA from continuing operations | 29.0 | % | 27.1 | % | N/A | |||||||
| Adjusted EBITDA from continuing operations | 32.8 | % |
| (a) See pro forma Income Statement Information in the preceding sections. | |||||||||||||
| (b) The income tax expense (benefit) on the non-GAAP pre-tax adjustments was determined using the applicable tax rates for the jurisdictions that were utilized in calculating the GAAP income tax expense (benefit) and included both current and deferred income tax amounts. | |||||||||||||
| (c) Net of income taxes which are shown separately in “Adjusted Income Taxes and Effective Tax Rate”. | |||||||||||||
| (d) The company believes that its non-GAAP measures excluding Purchase accounting impacts - Linde AG are useful to investors because: (i) the business combination was a merger of equals in an all-stock merger transaction, with no cash consideration, (ii) the company is managed on a geographic basis and the results of certain geographies are more heavily impacted by purchase accounting than others, causing results that are not comparable at the reportable segment level, therefore, the impacts of purchasing accounting adjustments to each segment vary and are not comparable within the company and when compared to other companies in similar regions, (iii) business management is evaluated and variable compensation is determined based on results excluding purchase accounting impacts, and; (iv) it is important to investors and analysts to understand the purchase accounting impacts to the financial statements. A summary of each of the adjustments made for Purchase accounting impacts - Linde AG are as follows: Adjusted Operating Profit and Margin: The purchase accounting adjustments for the year ended December 31, 2019 include (i) a $12 million adjustment for the increase in cost of sales related to the fair value step up of inventories acquired in the merger (included as a pro forma adjustment), and (ii) $1,940 in depreciation and amortization related to the fair value step up of fixed assets and intangible assets (primarily customer related) acquired in the merger. Adjusted Interest Expense - Net: Relates to the amortization of the fair value of debt acquired in the merger. Adjusted Income Taxes and Effective Tax Rate: Relates to the current and deferred income tax impact on the adjustments discussed above. The income tax expense (benefit) on the non-GAAP pre-tax adjustments was determined using the applicable tax rates for the jurisdictions that were utilized in calculating the GAAP income tax expense (benefit) and included both current and deferred income tax amounts. Adjusted Income from Equity Investments: Represents the amortization of increased fair value on equity investments related to depreciable and amortizable assets. Adjusted Noncontrolling Interests from Continuing Operations: Represents the noncontrolling interests’ ownership portion of the adjustments described above determined on an entity by entity basis. |
Net Debt and Adjusted Net Debt
Net debt is a financial liquidity measure used by investors, financial analysts and management to evaluate the ability of a company to repay its debt. Purchase accounting impacts have been excluded as they are non-cash and do not have an impact on liquidity.
| December 31, 2019 | December 31, 2018 | ||||||
| (Millions of dollars) | |||||||
| Debt | $ | 13,956 | $ | 15,296 | |||
| Less: cash and cash equivalents | (2,700 | ) | (4,466 | ) | |||
| Net debt | 11,256 | 10,830 | |||||
| Less: purchase accounting impacts - Linde AG | (195 | ) | (291 | ) | |||
| Adjusted net debt | $ | 11,061 | $ | 10,539 |
Previous: Item 4. MINE SAFETY DISCLOSURES · Next: Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK