NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
1. Formation of Linde plc and Business Combination of Praxair, Inc. and Linde AG
Formation of Linde plc
Linde plc ("Linde" or “the company”), a public limited company incorporated in Ireland, was formed in accordance with the requirements of the business combination agreement, dated as of June 1, 2017, as amended (the “business combination agreement”). Pursuant to the business combination agreement, among other things, Praxair, Inc., a Delaware corporation (“Praxair”), and Linde Aktiengesellschaft, a stock corporation incorporated under the laws of Germany (“Linde AG”), agreed to combine their respective businesses through an all-stock transaction, and become subsidiaries of the company (collectively referred to as “business combination” or “merger”). On October 31, 2018, Linde completed the business combination. Prior to the business combination, the company did not conduct any business activities other than those required for its formation and matters contemplated by the business combination agreement.
Business Combination of Praxair, Inc. and Linde AG
The business combination has been accounted for using the acquisition method of accounting in accordance with the provisions of the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification ("ASC") 805,
“Business Combinations”
, with Praxair representing the accounting acquirer. Pursuant to Rule 12g-3(a) under the Exchange Act, as of October 31, 2018, the company became the successor issuer to Praxair. Also, the Linde shares are deemed to be registered under Section 12(b) of the Exchange Act, and the company is subject to the informational requirements of the Exchange Act and the rules and regulations promulgated thereunder. The Linde shares trade on the New York Stock Exchange and the Frankfurt Stock Exchange under the ticker symbol “LIN”. Prior to the business combination, the Praxair shares were registered pursuant to Section 12(b) of the Exchange Act and listed on the NYSE. In connection with the completion of the business combination, the Praxair shares were suspended from trading on the NYSE as of close of business (New York Time) on October 30, 2018. On November 1, 2018, Praxair filed a Form 25 to de-list and de-register its three series of Euro-denominated notes, including its
1.50%
Notes due 2020,
1.20%
Notes due 2024 and
1.625%
Notes due 2025, that were listed on the NYSE. Trading of the Euro-denominated notes on the NYSE was suspended as of close of business (New York Time) on November 9, 2018, and Praxair filed a Form 15 with the SEC terminating the registration under the Exchange Act of its securities and suspending Praxair’s reporting obligations under Section 15(d) of the Exchange Act.
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 included the sale of the majority of Praxair’s European businesses (completed on December 3, 2018), the majority 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), as well as certain divestitures of other Praxair and Linde AG businesses in Asia that are currently expected to be sold in 2019 (collectively, the “merger-related divestitures”). See Note 17 for additional information relating to merger-related divestitures.
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 (i) continue to operate Linde AG and Praxair as independent, ongoing, economically viable, competitive businesses held separate, distinct, and apart from each other’s operations; (ii) not coordinate any aspect of the operations of Linde AG and Praxair, including the marketing or sale of any products; and (iii) maintain separate financial ledgers, books, and records that report on a periodic basis, consistent with past practices, the assets, liabilities, expenses, revenues, and income of each, until certain divestitures in the United States have been completed. The restrictions under the hold separate order were lifted March 1, 2019, concurrent with the sale of the required merger-related divestitures in the United States.
Comparability of Financial Information
Because Praxair and Linde AG combined their respective businesses effective with the merger date of October 31, 2018 in accordance with ASC 805, the quarter and
six months ended June 30, 2019
reflect the results and cash flows of the combined business, while the quarter and six months ended June 30, 2018 include only Praxair. Due to the size of Linde AG’s businesses prior to the merger, the reported results for
2019
and
2018
quarters are not comparable. The balance sheets at
June 30, 2019
and
December 31, 2018
are comparable because both periods reflect the merger.
2. Summary of Significant Accounting Policies
Presentation of Condensed Consolidated Financial Statements
-
In the opinion of Linde management, the accompanying condensed consolidated financial statements include all adjustments necessary for a fair presentation of the results for the interim periods presented and such adjustments are of a normal recurring nature. The accompanying condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements of Linde plc and subsidiaries in Linde's
2018
Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during
2019
.
Segment Presentation Change -
As a result of the merger and effective with the lifting of the Hold Separate Order in March 2019, new reportable segments were implemented. The new segments are: Americas, EMEA (Europe/Middle East/Africa), APAC (Asia/Pacific); and Engineering. All periods presented were recast to conform to the new segment structure. See Notes 1 and 13.
Accounting Standards Implemented in
2019
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|
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•
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Leases –
In February 2016, the FASB issued updated guidance on the accounting and financial statement presentation of leases. The new guidance requires lessees to recognize a right-of-use asset and lease liability for all leases, except those that meet certain scope exceptions, and requires expanded quantitative and qualitative disclosures. This guidance is effective beginning in the first quarter of 2019 and requires companies to transition using a modified retrospective approach. Linde has applied the practical expedient which allows prospective transition to the new lease accounting standard on January 1, 2019. The company elected the package of practical expedients relating to the reassessment of the lease portfolio pertaining to (i) whether expiring or existing contracts contain lease components, (ii) lease classification under ASC 842 and (iii) whether initial direct costs were capitalized under ASC 840. The company further implemented internal controls and key system functionality to enable the preparation of financial information on adoption.
|
The standard had an immaterial impact on our condensed consolidated balance sheets
and consolidated income statements. The most significant impact was the recognition of right of use ("ROU") assets and lease liabilities for operating leases, while the accounting for finance leases remained substantially unchanged. The company recognized both right of use assets and lease liabilities of
$1.2 billion
upon adoption. The adoption of the new lease accounting standard had no impact on retained earnings (See Note 16).
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•
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Derivatives and Hedging
- In August 2017, the FASB issued updated guidance on accounting for hedging activities. The new guidance simplifies hedge effectiveness documentation requirements, changes both the designation and measurement for qualifying hedging relationships and the presentation of hedge results. This guidance was effective for the company beginning in the first quarter of 2019. The adoption of the standard had an immaterial impact on the consolidated financial statements.
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Accounting Standards to be Implemented
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•
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Credit Losses on Financial Instruments
–
In June 2016, the FASB issued an update on the measurement of credit losses. The guidance introduces a new accounting model for expected credit losses on financial instruments, including trade receivables, based on estimates of current expected credit losses. This guidance will be effective for the company beginning in the first quarter 2020 and requires companies to apply the change in accounting on a prospective basis. The company is currently evaluating the impact this update will have on the consolidated financial statements.
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•
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Simplifying the Test for Goodwill Impairment
– In January 2017, the FASB issued updated guidance on the measurement of goodwill. The new guidance eliminates the requirement to calculate the implied fair value of goodwill to measure a goodwill impairment charge. The guidance will be effective for the company beginning in the first quarter 2020 with early adoption permitted. The company does not expect this guidance to have a material impact.
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•
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Fair Value Measurement Disclosures
- In August 2018, the FASB issued guidance that modifies the disclosure requirements for fair value measurements. The guidance is effective in fiscal year 2020, with early adoption permitted. Certain amendments must be applied prospectively while other amendments must be applied retrospectively. The company is evaluating the impact this guidance will have on the disclosures in the notes to the consolidated financial statements.
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|
|
|
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•
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Retirement Benefit Disclosures
- In August 2018, the FASB issued guidance that modifies the disclosure requirements for employers that sponsor defined benefit pension or other postretirement benefit plans. The guidance is effective in fiscal year 2021, with early adoption permitted, and must be applied on a retrospective basis. The company is evaluating the impact this guidance will have on the disclosures in the notes to the consolidated financial statements.
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Reclassifications
– Certain prior years’ amounts have been reclassified to conform to the current year’s presentation.
3. Cost Reduction Programs and Other Charges
2019 Charges
Cost reduction programs and other charges were
$141 million
and
$230 million
for the quarter and
six months ended June 30, 2019
, respectively (
$113 million
and
$194 million
, after-tax ). Following is a summary of the pre-tax charges by reportable segment for the quarter and six month periods ended June 30, 2019:
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|
|
|
|
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|
|
|
|
|
|
|
|
|
|
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|
|
|
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Quarter Ended June 30, 2019
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|
(millions of dollars)
|
Severance costs
|
|
Other cost reduction charges
|
|
Transaction related charges
|
|
Total
|
|
Americas
|
$
|
20
|
|
|
$
|
6
|
|
|
3
|
|
|
$
|
29
|
|
|
EMEA
|
4
|
|
|
2
|
|
|
10
|
|
|
16
|
|
|
APAC
|
13
|
|
|
1
|
|
|
1
|
|
|
15
|
|
|
Engineering
|
—
|
|
|
4
|
|
|
—
|
|
|
4
|
|
|
Other
|
5
|
|
|
21
|
|
|
51
|
|
|
77
|
|
|
Total
|
$
|
42
|
|
|
$
|
34
|
|
|
$
|
65
|
|
|
$
|
141
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30, 2019
|
|
(millions of dollars)
|
Severance costs
|
|
Other cost reduction charges
|
|
Transaction related charges
|
|
Total
|
|
Americas
|
$
|
20
|
|
|
$
|
7
|
|
|
27
|
|
|
$
|
54
|
|
|
EMEA
|
4
|
|
|
9
|
|
|
2
|
|
|
15
|
|
|
APAC
|
22
|
|
|
2
|
|
|
1
|
|
|
25
|
|
|
Engineering
|
—
|
|
|
11
|
|
|
—
|
|
|
11
|
|
|
Other
|
5
|
|
|
29
|
|
|
91
|
|
|
125
|
|
|
Total
|
$
|
51
|
|
|
$
|
58
|
|
|
$
|
121
|
|
|
$
|
230
|
|
Cost Reduction Programs
Total cost reduction program related charges were
$76 million
and
$109 million
for the quarter and
six months ended June 30, 2019
, respectively (
$61 million
and
$89 million
after-tax).
Severance costs
Severance costs of
$42 million
and
$51 million
for the quarter and
six months ended June 30, 2019
, respectively, are for the elimination of approximately
1,100
positions, largely in the Americas and APAC, of which approximately
700
have terminated employment. The majority of actions are anticipated to be completed in 2019.
Other cost reduction charges
Other cost reduction charges of
$34 million
and
$58 million
for the quarter and
six months ended June 30, 2019
, respectively, are primarily related to actions taken to execute the company's synergistic actions including location consolidations and rationalization, software and process harmonization, and associated non-recurring costs.
Transaction Related Charges
On October 31, 2018, Praxair and Linde AG combined under Linde plc, as contemplated by the business combination agreement (see Note 1). In connection with the business combination, Linde incurred merger-related costs which totaled
$65 million
and
$121 million
(
$52 million
and
$105 million
after-tax) for the quarter and
six months ended June 30, 2019
, respectively.
Cash Requirements
The total cash requirements of the cost reduction program and other charges during the six months ended June 30, 2019 are estimated to be approximately
$225 million
, of which
$135 million
was paid through June 30, 2019. Total cost reduction programs and other charges, net of payments in the condensed consolidated statements of cash flows for the six months ended June 30, 2019 also reflect the impact of cash payments of liabilities accrued as of December 31, 2018.
The following table summarizes the activities related to the company's cost reduction related charges for the
six months ended June 30, 2019
:
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|
|
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(millions of dollars)
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Severance costs
|
|
Other cost reduction charges
|
|
Transaction related charges
|
|
Total
|
|
2019 Cost Reduction Programs and Other Charges
|
$
|
51
|
|
|
$
|
58
|
|
|
$
|
121
|
|
|
$
|
230
|
|
|
Less: Cash payments
|
(37
|
)
|
|
(21
|
)
|
|
(77
|
)
|
|
(135
|
)
|
|
Less: Non-cash charges
|
—
|
|
|
(4
|
)
|
|
—
|
|
|
(4
|
)
|
|
Foreign currency translation and other
|
—
|
|
|
—
|
|
|
(1
|
)
|
|
(1
|
)
|
|
Balance, June 30, 2019
|
$
|
14
|
|
|
$
|
33
|
|
|
$
|
43
|
|
|
$
|
90
|
|
2018 Charges
Transaction costs and other charges were $
24 million
million and
$43 million
for the quarter and
six months ended June 30, 2018
, respectively (
$21 million
and
$39 million
after-tax and noncontrolling interests).
Classification in the condensed consolidated financial statements
The costs are shown within operating profit in a separate line item on the consolidated statements of income. On the condensed consolidated statement of cash flows, the impact of these costs, net of cash payments, is shown as an adjustment to reconcile net income to net cash provided by operating activities. In Note 13 - Segments, Linde excluded these costs from its management definition of segment operating profit; a reconciliation of segments operating profit to consolidated operating profit is shown within the segment operating profit table.
4
.
Merger of Praxair, Inc. and Linde AG
On October 31, 2018 Praxair and Linde AG combined their respective businesses through an all-stock transaction and became subsidiaries of the company.
In connection with the business combination, each share of common stock of Praxair par value
$0.01
per share, (excluding any shares held in treasury immediately prior to the effective time of the merger, which were automatically canceled and retired for no consideration) was converted into one ordinary share, par value
€0.001
per share, of Linde plc. Additionally, each tendered share of common stock of Linde AG was converted into
1.54
ordinary shares of Linde plc.
Preliminary Allocation of Purchase Price
In accordance with the FASB’s ASC 805,
"Business Combinations"
, Praxair was determined to be the accounting acquirer. As such, the company has applied the acquisition method of accounting with respect to the identifiable assets and liabilities of Linde AG, which have been measured at estimated fair value as of the date of the business combination.
In accordance with the business combination agreement, Linde AG shareholders that accepted the exchange offer received Linde shares in exchange for Linde AG shares at an exchange ratio of
1.54
Linde shares for each Linde AG share. Because Praxair is the accounting acquirer, the fair value of the equity issued by Linde plc to Linde AG shareholders in the exchange transaction was determined by reference to the market price of Praxair shares. Accordingly, the purchase consideration below reflects the estimated fair value of the
92%
of Linde AG shares tendered and Linde shares issued in exchange for those Linde AG shares, which is based on the final closing price of Praxair shares prior to the effective time of the merger on October 31, 2018 of
$164.50
per share.
The purchase price and estimated fair value of Linde AG’s net assets acquired as of the merger date on October 31, 2018 is presented as follows:
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|
|
|
|
|
(in thousands, except value per share data, Linde AG exchange ratio, and purchase price)
|
|
Linde AG common stock tendered as of October 31, 2018 (i)
|
170,875 Shares
|
|
Business combination agreement exchange ratio (ii)
|
1.54 : 1
|
|
Linde plc ordinary shares issued in exchange for Linde AG
|
263,148 Shares
|
|
Per share price of Praxair, Inc. common stock (iii)
|
$164.50
|
|
Purchase price (millions of dollars)
|
$43,288
|
|
|
|
|
|
|
|
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(i)
|
Number of Linde AG shares tendered in the 2017 Exchange Offer.
|
|
|
(ii)
|
Exchange ratio for Linde AG shares as set forth in the business combination agreement.
|
|
|
(iii)
|
Closing price of Praxair shares on the New York Stock Exchange prior to the effective time of the business combination on October 31, 2018.
|
In accordance with ASC 805, Linde AG's assets and liabilities were measured at estimated fair values at October 31, 2018, primarily using Level 3 inputs except debt which was Level 1. Estimates of fair value represent management's best estimate of assumptions about future events and uncertainties, including 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 used were generally obtained from historical data supplemented by current and anticipated market conditions and growth rates.
The following table summarizes the preliminary allocation of purchase price to the identifiable assets acquired and liabilities assumed by Linde, with the excess of the purchase price over the fair value of Linde AG’s net assets recorded as goodwill. Due to the timing of the business combination, the magnitude and multi-national nature of the net assets acquired, and the hold separate order which deferred integration of the two merged companies until March 1, 2019, at June 30, 2019 the valuation process to determine the fair values was not complete and further adjustments are expected in 2019. The company has estimated the preliminary fair value of net assets acquired based on information currently available and will continue to adjust those estimates as additional information becomes available, analysis is able to be performed, refinement of market participant assumptions, finalization of tax returns in the pre-merger period and the application of push-down accounting at the subsidiary level. The areas where the fair value assessments are not finalized and, therefore, subject to adjustment during the measurement period relate primarily to identifiable intangible assets, property, plant and equipment, net assets held for sale, equity investments, income taxes, noncontrolling interests, contingencies and goodwill. The more significant measurement period adjustments made by Linde during the
six months ended June 30, 2019
reflect: the agreed upon sale price of Linde AG’s Korean business resulting in an increase to assets held for sale and corresponding decrease to goodwill of
$324 million
, and an adjustment to the sale value of the Linde AG Americas businesses resulting in a decrease to assets held for sale and corresponding increase to goodwill of
$296 million
. As the company finalizes the fair value of assets acquired and liabilities assumed, additional purchase price allocation adjustments will likely be recorded during the measurement period, but no later than one year from the date of the acquisition. The company will reflect measurement period adjustments in the period in which the adjustments are determined.
The table below reflects the impact of measurement period adjustments made through June 30, 2019. The final determination of the fair values will likely result in further adjustments to the values presented in the following table:
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|
|
|
|
|
|
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Millions of dollars
|
Estimated Fair Value
|
|
Assets
|
|
|
Cash and cash equivalents
|
$
|
1,363
|
|
|
Accounts receivable – net
|
2,859
|
|
|
Inventories
|
1,452
|
|
|
Assets held for sale
|
5,208
|
|
|
Prepaid and other current assets
|
1,251
|
|
|
Property, plant and equipment
|
19,366
|
|
|
Equity investments
|
1,395
|
|
|
Goodwill
|
24,193
|
|
|
Other intangible assets
|
15,592
|
|
|
Other long-term assets
|
978
|
|
|
Total Assets Acquired
|
$
|
73,657
|
|
|
Less: Liabilities Assumed
|
|
|
Accounts payable
|
$
|
3,360
|
|
|
Short-term debt
|
1,177
|
|
|
Current portion of long-term debt
|
1,864
|
|
|
Accrued taxes
|
159
|
|
|
Liabilities of assets held for sale
|
676
|
|
|
Other current liabilities
|
3,032
|
|
|
Long-term debt
|
6,295
|
|
|
Other long-term liabilities
|
1,908
|
|
|
Deferred credits, including deferred income taxes
|
6,752
|
|
|
Total Liabilities Assumed
|
$
|
25,223
|
|
|
Less: Noncontrolling Interests
|
5,146
|
|
|
Purchase Price (i)
|
$
|
43,288
|
|
|
|
|
|
|
|
|
|
(i)
|
See above for the calculation of the purchase price.
|
Summary of Significant Fair Value Methods
The methods used to determine the fair value of significant identifiable assets and liabilities included in the preliminary allocation of purchase price are included in Note 3 to the consolidated financial statements in the company’s Annual Report on Form 10-K for the year ended
December 31, 2018
. The excess of the consideration for the merger over the preliminary fair value of net assets acquired was recorded as goodwill. The merger resulted in the recognition of
$24,193 million
of goodwill, which is not deductible for tax purposes. The goodwill balance is primarily attributed to the assembled workforce, expanded market opportunities and cost and other operating synergies anticipated upon the integration of the operations of Praxair and Linde AG. The push down of goodwill to reporting units is not final and may differ from this preliminary determination.
Unaudited Pro Forma Information
Linde's unaudited pro forma results presented below were prepared pursuant to the requirements of ASC 805 and give effect to the merger as if it had been consummated on January 1, 2017. The pro forma results have been prepared for comparative purposes only, and do not necessarily represent what the revenue or results of operations would have been had the merger been completed on January 1, 2017. In addition, these results are not intended to be a projection of future operating results and do not reflect synergies that might be achieved.
The unaudited pro forma results include adjustments for the preliminary purchase accounting impact (including, but not limited to, depreciation and amortization associated with the acquired tangible and intangible assets, amortization of the fair value adjustment to investment in nonconsolidated affiliates, and reduction of interest expense related to the fair value adjustment to long-term debt along with the related tax and non-controlling interest impacts), the alignment of accounting policies, adjustments due to IFRS compliant reporting conversion to U.S. GAAP and the elimination of transactions between Praxair and Linde AG.
The unaudited pro forma results presented below exclude the results of operations of the Linde AG merger-related divestitures (see Note 17) as these divestitures are reflected as discontinued operations. The Praxair merger-related divestitures (see Note 17) are included in the results from continuing operations, including the results from Praxair's European business through the disposition date of December 3, 2018, in the unaudited pro forma results presented below, for all periods presented, as these divestitures do not qualify for discontinued operations.
The unaudited pro forma results for the quarter and
six months ended June 30, 2019
and 2018, prepared in accordance with ASC 805, are summarized below:
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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*Quarter Ended June 30,
|
|
**Six Months Ended June 30,
|
|
Millions of dollars
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Sales
|
$
|
7,204
|
|
|
$
|
7,660
|
|
|
$
|
14,148
|
|
|
$
|
15,061
|
|
|
Income from continuing operations
|
$
|
513
|
|
|
$
|
657
|
|
|
$
|
996
|
|
|
$
|
1,256
|
|
|
Diluted earnings per share from continuing operations
|
$
|
0.94
|
|
|
$
|
1.18
|
|
|
$
|
1.82
|
|
|
$
|
2.26
|
|
* The quarter ended June 30, 2019 includes sales and income from continuing operations from the company's merger-related divestitures of
$25 million
and
$4 million
, respectively (2018 includes
$456 million
and
$100 million
, respectively).
**The six months ended June 30, 2019 includes sales and income from continuing operations from the company's merger-related divestitures of
$55 million
and
$9 million
, respectively (2018 includes
$891 million
and
$191 million
, respectively).
Significant nonrecurring amounts reflected in the pro forma results are as follows:
For the quarter and six month periods ended June 30, 2018, Praxair Inc., and Linde AG collectively incurred pre-tax costs of
$69 million
and
$129 million
, respectively, to prepare for and close the merger. These costs were reflected within the results of operations in the pro forma results as if they were incurred on January 1, 2017. Any costs incurred related to merger-related divestitures and integration and to prepare for the intended business separations were reflected in the pro-forma results in the period in which they were incurred.
The company incurred pre-tax charges of
$10 million
(
$8 million
after tax) and
$51 million
(
$40 million
after tax) in the first quarter of 2019 related to the amortization of the fair value step-up of inventories acquired and sold, as well as a pension settlement due to payments to certain participants as a result of change in control provisions within a U.S. nonqualified pension plan, respectively. The six month period ended June 30, 2019 pro forma results were adjusted to exclude these charges as these costs were reflected within the results of operations in the pro formas results as if they were incurred on January 1, 2017.
Non-Merger Related Acquisitions
Acquisitions were
$140 million
, net of cash acquired, during the
six months ended June 30, 2019
, largely in the Americas. Acquisition activity was immaterial for the same period in
2018
.
5. Supplemental Information
Inventories
The following is a summary of Linde's consolidated inventories:
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|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
June 30,
2019
|
|
December 31,
2018
|
|
Inventories
|
|
|
|
|
Raw materials and supplies
|
$
|
362
|
|
|
$
|
339
|
|
|
Work in process
|
337
|
|
|
321
|
|
|
Finished goods
|
1,009
|
|
|
991
|
|
|
Total inventories
|
$
|
1,708
|
|
|
$
|
1,651
|
|
6. Debt
The following is a summary of Linde's outstanding debt at
June 30, 2019
and
December 31, 2018
:
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
June 30,
2019
|
|
December 31,
2018
|
|
SHORT-TERM
|
|
|
|
|
Commercial paper and U.S. bank borrowings
|
$
|
785
|
|
|
$
|
829
|
|
|
Other bank borrowings (primarily international)
|
690
|
|
|
656
|
|
|
Total short-term debt
|
1,475
|
|
|
1,485
|
|
|
LONG-TERM (a)
|
|
|
|
|
(U.S. dollar denominated unless otherwise noted)
|
|
|
|
|
1.90% Notes due 2019 (b)
|
—
|
|
|
500
|
|
|
Variable rate notes due 2019 (b)
|
—
|
|
|
150
|
|
|
1.75% Euro denominated notes due 2019 (b,c)
|
—
|
|
|
578
|
|
|
4.25% AUD denominated notes due 2019 (b)
|
—
|
|
|
71
|
|
|
Variable rate notes due 2019
|
200
|
|
|
200
|
|
|
2.25% Notes due 2020
|
300
|
|
|
299
|
|
|
1.75% Euro denominated notes due 2020 (c)
|
1,163
|
|
|
1,185
|
|
|
0.634% Euro denominated notes due 2020
|
58
|
|
|
58
|
|
|
4.05% Notes due 2021
|
499
|
|
|
499
|
|
|
3.875% Euro denominated notes due 2021 (c)
|
735
|
|
|
755
|
|
|
3.00% Notes due 2021
|
498
|
|
|
498
|
|
|
0.250% Euro denominated notes due 2022 (c)
|
1,147
|
|
|
1,156
|
|
|
2.45% Notes due 2022
|
598
|
|
|
598
|
|
|
2.20% Notes due 2022
|
499
|
|
|
498
|
|
|
2.70% Notes due 2023
|
498
|
|
|
498
|
|
|
2.00% Euro denominated notes due 2023 (c)
|
796
|
|
|
805
|
|
|
5.875% GBP denominated notes due 2023 (c)
|
447
|
|
|
454
|
|
|
1.20% Euro denominated notes due 2024
|
623
|
|
|
628
|
|
|
1.875% Euro denominated notes due 2024 (c)
|
369
|
|
|
373
|
|
|
2.65% Notes due 2025
|
398
|
|
|
398
|
|
|
1.625% Euro denominated notes due 2025
|
563
|
|
|
568
|
|
|
3.20% Notes due 2026
|
725
|
|
|
725
|
|
|
3.434% Notes due 2026
|
196
|
|
|
195
|
|
|
1.652% Euro denominated notes due 2027
|
95
|
|
|
96
|
|
|
1.00% Euro denominated notes due 2028 (c)
|
885
|
|
|
861
|
|
|
1.90% Euro denominated notes due 2030
|
120
|
|
|
121
|
|
|
3.55% Notes due 2042
|
662
|
|
|
662
|
|
|
Other
|
10
|
|
|
10
|
|
|
International bank borrowings
|
266
|
|
|
291
|
|
|
Obligations under capital leases
|
132
|
|
|
81
|
|
|
|
12,482
|
|
|
13,811
|
|
|
Less: current portion of long-term debt
|
(227
|
)
|
|
(1,523
|
)
|
|
Total long-term debt
|
12,255
|
|
|
12,288
|
|
|
Total debt
|
$
|
13,957
|
|
|
$
|
15,296
|
|
|
|
|
|
(a)
|
Amounts are net of unamortized discounts, premiums and/or debt issuance costs as applicable.
|
|
|
|
|
(b)
|
In February 2019 Linde repaid
$500 million
of
1.90%
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 became due and the associated interest rate swap was settled; also in June 2019 Linde settled AUD
100 million
of variable rate notes that became due.
|
|
|
|
|
(c)
|
June 30, 2019
and
December 31, 2018
included a cumulative
$59 million
and
$14 million
adjustment to carrying value, respectively, related to hedge accounting of interest rate swaps. Refer to Note 7 for additional information.
|
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
June 30, 2019
.
7. Financial Instruments
In its normal operations, Linde is exposed to market risks relating to fluctuations in interest rates, foreign currency exchange rates, energy costs and to a lesser extent precious metal prices. The objective of financial risk management at Linde is to minimize the negative impact of such fluctuations on the company’s earnings and cash flows. To manage these risks, among other strategies, Linde routinely enters into various derivative financial instruments (“derivatives”) including interest-rate swap and treasury rate lock agreements, currency-swap agreements, forward contracts, currency options, and commodity-swap agreements. These instruments are not entered into for trading purposes and Linde only uses commonly traded and non-leveraged instruments.
There are three types of derivatives that the company enters into: (i) those relating to fair-value exposures, (ii) those relating to cash-flow exposures, and (iii) those relating to foreign currency net investment exposures. Fair-value exposures relate to recognized assets or liabilities, and firm commitments; cash-flow exposures relate to the variability of future cash flows associated with recognized assets or liabilities, or forecasted transactions; and net investment exposures relate to the impact of foreign currency exchange rate changes on the carrying value of net assets denominated in foreign currencies.
When a derivative is executed and hedge accounting is appropriate, it is designated as either a fair-value hedge, cash-flow hedge, or a net investment hedge. Currently, Linde designates all interest-rate and treasury-rate locks as hedges for accounting purposes; however, currency contracts are generally not designated as hedges for accounting purposes unless they are related to forecasted transactions. Whether designated as hedges for accounting purposes or not, all derivatives are linked to an appropriate underlying exposure. On an ongoing basis, the company assesses the hedge effectiveness of all derivatives designated as hedges for accounting purposes to determine if they continue to be highly effective in offsetting changes in fair values or cash flows of the underlying hedged items. If it is determined that the hedge is not highly effective, then hedge accounting will be discontinued prospectively.
Counterparties to Linde's derivatives are major banking institutions with credit ratings of investment grade or better. The company has Credit Support Annexes ("CSAs") in place with their principal counterparties to minimize potential default risk and to mitigate counterparty risk. Under the CSAs, the fair values of derivatives for the purpose of interest rate and currency management are collateralized with cash on a regular basis. As of
June 30, 2019
, the impact of such collateral posting arrangements on the fair value of derivatives was insignificant. Management believes the risk of incurring losses on derivative contracts related to credit risk is remote and any losses would be immaterial.
The following table is a summary of the notional amount and fair value of derivatives outstanding at
June 30, 2019
and
December 31, 2018
for consolidated subsidiaries:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value
|
|
|
Notional Amounts
|
|
Assets (a)
|
|
Liabilities (a)
|
|
(Millions of dollars)
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Derivatives Not Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items
|
$
|
8,979
|
|
|
$
|
6,357
|
|
|
$
|
27
|
|
|
$
|
24
|
|
|
$
|
41
|
|
|
$
|
42
|
|
|
Forecasted transactions
|
938
|
|
|
945
|
|
|
11
|
|
|
15
|
|
|
41
|
|
|
17
|
|
|
Interest rate/Cross-currency interest rate swaps
|
1,253
|
|
|
2,110
|
|
|
27
|
|
|
112
|
|
|
24
|
|
|
40
|
|
|
Commodity contracts
|
—
|
|
|
—
|
|
|
—
|
|
|
27
|
|
|
—
|
|
|
9
|
|
|
Total
|
$
|
11,170
|
|
|
$
|
9,412
|
|
|
$
|
65
|
|
|
$
|
178
|
|
|
$
|
106
|
|
|
$
|
108
|
|
|
Derivatives Designated as Hedging Instruments:
|
|
|
|
|
|
|
|
|
|
|
|
|
Currency contracts:
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance sheet items
|
$
|
35
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
—
|
|
|
Forecasted transactions
|
584
|
|
|
158
|
|
|
34
|
|
|
2
|
|
|
9
|
|
|
3
|
|
|
Commodity contracts
|
—
|
|
|
—
|
|
|
22
|
|
|
—
|
|
|
2
|
|
|
—
|
|
|
Interest rate swaps
|
2,142
|
|
|
2,164
|
|
|
43
|
|
|
13
|
|
|
3
|
|
|
10
|
|
|
Total Hedges
|
$
|
2,761
|
|
|
$
|
2,322
|
|
|
$
|
100
|
|
|
$
|
15
|
|
|
$
|
15
|
|
|
$
|
13
|
|
|
Total Derivatives
|
$
|
13,931
|
|
|
$
|
11,734
|
|
|
$
|
165
|
|
|
$
|
193
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
|
|
|
(a)
|
Current assets of
$85 million
are recorded in prepaid and other current assets; long-term assets of
$80 million
are recorded in other long-term assets; current liabilities of
$78 million
are recorded in other current liabilities; and long-term liabilities of
$43 million
are recorded in other long-term liabilities.
|
Balance Sheet Items
Foreign currency contracts related to balance sheet items consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on recorded balance sheet assets and liabilities denominated in currencies other than the functional currency of the related operating unit. Certain forward currency contracts are entered into to protect underlying monetary assets and liabilities denominated in foreign currencies from foreign exchange risk and are not designated as hedging instruments. For balance sheet items that are not designated as hedging instruments, the fair value adjustments on these contracts are offset by the fair value adjustments recorded on the underlying monetary assets and liabilities.
Forecasted Transactions
Foreign currency contracts related to forecasted transactions consist of forward contracts entered into to manage the exposure to fluctuations in foreign-currency exchange rates on (1) forecasted purchases of capital-related equipment and services, (2) forecasted sales, or (3) other forecasted cash flows denominated in currencies other than the functional currency of the related operating units. For forecasted transactions that are designated as cash flow hedges, fair value adjustments are recorded to accumulated other comprehensive income ("AOCI") with deferred amounts reclassified to earnings over the same time period as the income statement impact of the associated purchase. For forecasted transactions that do not qualify for cash flow hedging relationships, fair value adjustments are recorded directly to earnings.
Interest Rate/Cross-Currency Interest Rate Swaps
Cross-currency interest rate swaps are entered into to limit the foreign currency risk of future principal and interest cash flows associated with intercompany loans, and to a more limited extent bonds, denominated in non-functional currencies. The fair value adjustments on the cross-currency swaps are recorded to earnings, where they are offset by fair value adjustments on the underlying intercompany loan or bond.
Commodity Contracts
Commodity contracts are entered into to manage the exposure to fluctuations in commodity prices, which arise in the normal course of business from its procurement transactions. To reduce the extent of this risk, Linde enters into a limited number of electricity,
natural gas, and propane gas derivatives. The fair value adjustments on these contracts are recorded to AOCI and are eventually offset by the income statement impact of the underlying commodity purchase.
Net Investment Hedge
As of
June 30, 2019
, Linde has not designated any hedges of net investment positions in foreign operations. Linde had previously designated Euro-denominated debt instruments as net investment hedges to reduce the company's exposure to changes in the currency exchange rate on investments in foreign subsidiaries with Euro functional currencies. Exchange rate movements of $
206 million
relating to the previously designated Euro-denominated debt incurred in the financial periods prior to de-designation will remain in AOCI, until appropriate, such as liquidation of the foreign operations at which time amounts will be reclassified to the consolidated statement of income. Exchange rate movements related to the Euro-denominated debt occurring after de-designation are shown in the consolidated statement of income.
Interest Rate Swaps
Linde uses interest rate swaps to hedge the exposure to changes in the fair value of financial assets and financial liabilities as a result of interest rate changes. These interest rate swaps effectively convert fixed-rate interest exposures to variable rates; fair value adjustments are recognized in earnings along with an equally offsetting charge/benefit to earnings for the changes in the fair value of the underlying financial asset or financial liability. The notional value of outstanding interest rate swaps of Linde with maturity dates from 2019 through 2028 was
$1,920 million
at
June 30, 2019
and
$2,164 million
at
December 31, 2018
(see Note 6 for further information).
Terminated Treasury Rate Locks
The unrecognized aggregated losses related to terminated treasury rate lock contracts on the underlying
$500 million
3.00%
fixed-rate notes that mature in 2021 and the
$500 million
2.20%
fixed-rate notes that mature in 2022 at
June 30, 2019
and
December 31, 2018
were
$2 million
(net of taxes of
$1 million
) and
$2 million
(net of taxes of
$1 million
), respectively. The unrecognized gains / (losses) for the treasury rate locks are shown in AOCI and are being recognized on a straight line basis to interest expense – net over the term of the underlying debt agreements.
Derivatives' Impact on Consolidated Statements of Income
The following table summarizes the impact of the company’s derivatives on the consolidated statements of income:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amount of Pre-Tax Gain (Loss)
Recognized in Earnings *
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Derivatives Not Designated as Hedging Instruments
|
|
|
|
|
|
|
|
|
Currency contracts:
|
|
|
|
|
|
|
|
|
Balance sheet items
|
|
|
|
|
|
|
|
|
Debt-related
|
$
|
(125
|
)
|
|
$
|
(68
|
)
|
|
$
|
69
|
|
|
$
|
(32
|
)
|
|
Other balance sheet items
|
4
|
|
|
(1
|
)
|
|
2
|
|
|
1
|
|
|
Total
|
$
|
(121
|
)
|
|
$
|
(69
|
)
|
|
$
|
71
|
|
|
$
|
(31
|
)
|
* The gains (losses) on balance sheet items are offset by gains (losses) recorded on the underlying hedged assets and liabilities. Accordingly, the gains (losses) for the derivatives and the underlying hedged assets and liabilities related to debt items are recorded in the consolidated statements of income as interest expense-net. Other balance sheet items and anticipated net income gains (losses) are recorded in the consolidated statements of income as other income (expenses)-net.
The amounts of gain or loss recognized in AOCI and reclassified to the consolidated statement of income was immaterial for both the quarter and
six months ended June 30, 2019
. Net losses expected to be reclassified to earnings during the next twelve months are also not material.
The gains (losses) on net investment hedges are recorded as a component of AOCI within foreign currency translation adjustments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on treasury rate locks are recorded as a component of AOCI within derivative instruments in the condensed consolidated balance sheets and the condensed consolidated statements of comprehensive income. The gains (losses) on net investment hedges are reclassified to earnings only when the related currency translation adjustments are required to be reclassified, usually upon sale
or liquidation of the investment. The gains (losses) for interest rate contracts are reclassified to earnings as interest expense –net on a straight-line basis over the remaining maturity of the underlying debt.
8. Fair Value Disclosures
The fair value hierarchy prioritizes the inputs to valuation techniques used to measure fair value into three broad levels as follows:
Level 1 – quoted prices in active markets for identical assets or liabilities
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
Assets and Liabilities Measured at Fair Value on a Recurring Basis
The following table summarizes assets and liabilities measured at fair value on a recurring basis:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements Using
|
|
|
Level 1
|
|
Level 2
|
|
Level 3
|
|
(Millions of dollars)
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
|
June 30,
2019
|
|
December 31,
2018
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative assets
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
165
|
|
|
$
|
193
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
Investments and securities*
|
21
|
|
|
22
|
|
|
—
|
|
|
—
|
|
|
29
|
|
|
30
|
|
|
Total
|
$
|
21
|
|
|
$
|
22
|
|
|
$
|
165
|
|
|
$
|
193
|
|
|
$
|
29
|
|
|
$
|
30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
121
|
|
|
$
|
121
|
|
|
$
|
—
|
|
|
$
|
—
|
|
* Investments and securities are recorded in prepaid and other current assets in the company's condensed consolidated balance sheets.
Level 1 investments and securities are marketable securities traded on an exchange. Level 2 investments are based on market prices obtained from independent brokers or determined using quantitative models that use as their basis readily observable market parameters that are actively quoted and can be validated through external sources, including third-party pricing services, brokers and market transactions. Level 3 investments and securities consist of a venture fund. For the valuation, Linde uses the net asset value received as part of the fund's quarterly reporting, which for the most part is not based on quoted prices in active markets. In order to reflect current market conditions, Linde proportionally adjusts these by observable market data (stock exchange prices) or current transaction prices.
The following table summarizes the changes in level 3 investments and securities for the
six months ended June 30, 2019
. Gains (losses) recognized in earnings are recorded to interest expense - net in the company's consolidated statements of income.
|
|
|
|
|
|
|
|
(Millions of dollars)
|
2019
|
|
Balance at January 1
|
$
|
30
|
|
|
Gains (losses) recognized in earnings
|
(1
|
)
|
|
Balance at June 30
|
$
|
29
|
|
The fair value of cash and cash equivalents, short-term debt, accounts receivables-net, and accounts payable approximate carrying value because of the short-term maturities of these instruments.
The fair value of long-term debt is estimated based on the quoted market prices for the same or similar issues. Long-term debt is categorized within either Level 1 or Level 2 of the fair value hierarchy depending on the trading volume of the issues and whether or not they are actively quoted in the market as opposed to traded through over-the-counter transactions. At
June 30, 2019
, the estimated fair value of Linde’s long-term debt portfolio was
$12,819 million
versus a carrying value of
$12,482 million
. At
December 31, 2018
, the estimated fair value of Linde’s long-term debt portfolio was
$13,725 million
versus a carrying value of
$13,811 million
. As Linde AG's assets and liabilities were measured at estimated fair value as of the merger date, differences between the carrying value and the fair value are insignificant; remaining differences are attributable to fluctuations in interest rates subsequent to when the debt was issued and relative to stated coupon rates.
9. Earnings Per Share – Linde plc Shareholders
Basic and diluted earnings per share is computed by dividing Income from continuing operations, Income from discontinued operations and Net income – Linde plc for the period by the weighted average number of either basic or diluted shares outstanding, as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Numerator (Millions of dollars)
|
|
|
|
|
|
|
|
|
Income from continuing operations
|
$
|
513
|
|
|
$
|
480
|
|
|
$
|
948
|
|
|
$
|
942
|
|
|
Income from discontinued operations
|
9
|
|
|
—
|
|
|
91
|
|
|
—
|
|
|
Net Income – Linde plc
|
$
|
522
|
|
|
$
|
480
|
|
|
$
|
1,039
|
|
|
$
|
942
|
|
|
Denominator (Thousands of shares)
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding
|
542,356
|
|
|
287,467
|
|
|
543,834
|
|
|
287,321
|
|
|
Shares earned and issuable under compensation plans
|
205
|
|
|
336
|
|
|
199
|
|
|
333
|
|
|
Weighted average shares used in basic earnings per share
|
542,561
|
|
|
287,803
|
|
|
544,033
|
|
|
287,654
|
|
|
Effect of dilutive securities
|
|
|
|
|
|
|
|
|
Stock options and awards
|
3,927
|
|
|
3,105
|
|
|
3,738
|
|
|
3,272
|
|
|
Weighted average shares used in diluted earnings per share
|
546,488
|
|
|
290,908
|
|
|
547,771
|
|
|
290,926
|
|
|
Basic earnings per share from continuing operations
|
$
|
0.95
|
|
|
$
|
1.67
|
|
|
$
|
1.74
|
|
|
$
|
3.27
|
|
|
Basic earnings per share from discontinued operations
|
0.02
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
|
Basic Earnings Per Share
|
$
|
0.97
|
|
|
$
|
1.67
|
|
|
$
|
1.91
|
|
|
$
|
3.27
|
|
|
Diluted earnings per share from continuing operations
|
$
|
0.94
|
|
|
$
|
1.65
|
|
|
$
|
1.73
|
|
|
$
|
3.24
|
|
|
Diluted earnings per share from discontinued operations
|
0.02
|
|
|
—
|
|
|
0.17
|
|
|
—
|
|
|
Diluted Earnings Per Share
|
$
|
0.96
|
|
|
$
|
1.65
|
|
|
$
|
1.90
|
|
|
$
|
3.24
|
|
There were
no
antidilutive shares for any period presented.
10. Goodwill and Other Intangible Assets
Changes in the carrying amount of goodwill for the
six months ended June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Americas
|
|
EMEA
|
|
APAC
|
|
Engineering
|
|
Other
|
|
Total
|
|
Balance, December 31, 2018*
|
$
|
9,174
|
|
|
$
|
10,960
|
|
|
$
|
5,295
|
|
|
$
|
1,075
|
|
|
$
|
370
|
|
|
$
|
26,874
|
|
|
Measurement period adjustments*
|
342
|
|
|
8
|
|
|
(303
|
)
|
|
—
|
|
|
—
|
|
|
47
|
|
|
Acquisitions
|
120
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
120
|
|
|
Foreign currency translation
|
—
|
|
|
(83
|
)
|
|
(1
|
)
|
|
—
|
|
|
(10
|
)
|
|
(94
|
)
|
|
Balance, June 30, 2019
|
$
|
9,636
|
|
|
$
|
10,885
|
|
|
$
|
4,991
|
|
|
$
|
1,075
|
|
|
$
|
360
|
|
|
$
|
26,947
|
|
* The final determination of the goodwill assignment to segments may result in further measurement period adjustments to the preliminary values recorded in the purchase accounting for the merger (see Note 4).
Goodwill is tested annually in the second quarter and when there is an indication of an impairment. Effective October 31, 2018, Praxair and Linde AG combined their respective businesses and became subsidiaries of Linde plc. During the first quarter following the lifting of the Hold Separate Order on March 1, 2019, the company realigned the reporting units. In addition to the impairment analysis performed immediately prior to the change and following the realignment of reporting units, the annual test was executed during the quarter ended
June 30, 2019
. For all assessments Linde applied the FASB's accounting guidance per ASC 350 which allows the company to first assess qualitative factors to determine the extent of additional quantitative analysis, if any, that may be required to test goodwill for impairment (refer to Note 1 to the consolidated financial statements of Linde's 2018 Annual Report on Form 10-K). Based on the qualitative analysis, Linde determined that it was more likely than not that the fair value of each of its reporting units exceeded its carrying value and therefore further quantitative analysis was not required. Additionally, the company reviews the financial performance of its reporting units over the course of the year to assess whether circumstances have changed that would indicate it is more likely than not that the fair value of a reporting unit has declined below its carrying value. In cases
where an indication of impairment is determined to exist, the company completes an interim goodwill impairment test specifically for that reporting unit. As a result,
no
impairment was recorded and there were no indicators of impairment through
June 30, 2019
.
Changes in the carrying amounts of other intangibles for the
six months ended June 30, 2019
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Customer relationships
|
|
Brands/Tradenames
|
|
Other Intangible Assets
|
|
Total
|
|
Cost:
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
(1)
|
$
|
13,288
|
|
|
$
|
2,288
|
|
|
$
|
1,366
|
|
|
$
|
16,942
|
|
|
Additions
|
25
|
|
|
6
|
|
|
10
|
|
|
41
|
|
|
Foreign currency translation
|
(46
|
)
|
|
(10
|
)
|
|
(3
|
)
|
|
(59
|
)
|
|
Other
|
(1
|
)
|
|
—
|
|
|
21
|
|
|
20
|
|
|
Balance, June 30, 2019
|
$
|
13,266
|
|
|
$
|
2,284
|
|
|
$
|
1,394
|
|
|
$
|
16,944
|
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
|
|
Balance, December 31, 2018
|
$
|
(317
|
)
|
|
$
|
(22
|
)
|
|
$
|
(380
|
)
|
|
$
|
(719
|
)
|
|
Amortization expense
|
(314
|
)
|
|
(18
|
)
|
|
(93
|
)
|
|
(425
|
)
|
|
Foreign currency translation
|
(1
|
)
|
|
—
|
|
|
3
|
|
|
2
|
|
|
Other
|
—
|
|
|
—
|
|
|
2
|
|
|
2
|
|
|
Balance, June 30, 2019
|
$
|
(632
|
)
|
|
$
|
(40
|
)
|
|
$
|
(468
|
)
|
|
$
|
(1,140
|
)
|
|
Net balance at June 30, 2019
|
$
|
12,634
|
|
|
$
|
2,244
|
|
|
$
|
926
|
|
|
$
|
15,804
|
|
|
|
|
|
(1)
|
Final determination of the intangible asset values may result in measurement period adjustments to the preliminary values recorded in the purchase accounting for the merger (see Note 4).
|
There are no expected residual values related to these intangible assets. The remaining weighted-average amortization period for intangible assets is approximately
26 years
.
Total estimated annual amortization expense is as follows:
|
|
|
|
|
|
|
|
(Millions of dollars)
|
|
|
Remaining 2019
|
$
|
465
|
|
|
2020
|
996
|
|
|
2021
|
839
|
|
|
2022
|
806
|
|
|
2023
|
783
|
|
|
Thereafter
|
10,246
|
|
|
Total amortization related to finite-lived intangible assets
|
14,135
|
|
|
Indefinite-lived intangible assets at June 30, 2019
|
1,669
|
|
|
Net intangible assets at June 30, 2019
|
$
|
15,804
|
|
11. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarter and six months ended June 30, 2019 and
2018
are shown below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
|
|
Pensions
|
|
OPEB
|
|
Pensions
|
|
OPEB
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
Amount recognized in Operating Profit
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service cost
|
$
|
39
|
|
|
$
|
12
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
78
|
|
|
$
|
24
|
|
|
$
|
1
|
|
|
$
|
1
|
|
|
Amount recognized in Net pension and OPEB cost (benefit), excluding service cost
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest cost
|
65
|
|
|
25
|
|
|
1
|
|
|
1
|
|
|
133
|
|
|
51
|
|
|
3
|
|
|
2
|
|
|
Expected return on plan assets
|
(113
|
)
|
|
(41
|
)
|
|
—
|
|
|
—
|
|
|
(232
|
)
|
|
(83
|
)
|
|
—
|
|
|
—
|
|
|
Net amortization and deferral
|
14
|
|
|
18
|
|
|
(1
|
)
|
|
(1
|
)
|
|
28
|
|
|
36
|
|
|
(2
|
)
|
|
(2
|
)
|
|
Curtailment and termination benefits (a)
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
10
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
Settlement charge (b)
|
—
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
51
|
|
|
—
|
|
|
—
|
|
|
—
|
|
|
|
(24
|
)
|
|
2
|
|
|
—
|
|
|
—
|
|
|
(10
|
)
|
|
4
|
|
|
1
|
|
|
—
|
|
|
Net periodic benefit cost
|
$
|
15
|
|
|
$
|
14
|
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
68
|
|
|
$
|
28
|
|
|
$
|
2
|
|
|
$
|
1
|
|
(a) In the second quarter of 2019, Linde recorded a curtailment gain of
$7 million
and a charge of
$17 million
for termination benefits in connection with a defined benefit pension plan freeze.
(b) In the first quarter of 2019, benefits of
$91 million
were paid related to the settlement of a U.S. non-qualified plan that was triggered due to a change in control provision. Accordingly, Linde recorded a pension settlement charge of
$51 million
(
$38 million
after-tax, or
$0.07
per diluted share).
Linde estimates that
2019
required contributions to its pension plans will be in the range of $
95
million to $
160
million, of which
$43 million
have been made through
June 30, 2019
.
12. Commitments and Contingencies
Contingent Liabilities
Linde is subject to various lawsuits and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others. Linde has strong defenses in these cases and intends to defend itself vigorously. It is possible that the company may incur losses in connection with some of these actions in excess of accrued liabilities. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a significant impact on the company’s reported results of operations in any given period (see Note 19 to the consolidated financial statements of Linde's
2018
Annual Report on Form 10-K).
Significant matters are:
|
|
|
|
•
|
During May 2009, the Brazilian government published Law 11941/2009 instituting a new voluntary amnesty program (“Refis Program”) which allowed Brazilian companies to settle certain federal tax disputes at reduced amounts. During the 2009 third quarter, the company decided that it was economically beneficial to settle many of its outstanding federal tax disputes and such disputes were enrolled in the Refis Program, subject to final calculation and review by the Brazilian federal government. The company recorded estimated liabilities based on the terms of the Refis Program. Since 2009, Linde has been unable to reach final agreement on the calculations and initiated litigation against the government in an attempt to resolve certain items. Open issues relate to the following matters: (i) application of cash deposits and net operating loss carryforwards to satisfy obligations and (ii) the amount of tax reductions available under the Refis Program. It is difficult to estimate the timing of resolution of legal matters in Brazil.
|
|
|
|
|
•
|
At
June 30, 2019
the most significant non-income and income tax claims in Brazil, after enrollment in the Refis Program, relate to state VAT tax matters and a federal income tax matter where the taxing authorities are challenging the tax rate that should be applied to income generated by a subsidiary company. The total estimated exposure relating to such claims, including interest and penalties, as appropriate, is approximately
$210 million
. Linde has not recorded any liabilities related to such claims based on management judgments, after considering judgments and opinions of outside counsel. Because
|
litigation in Brazil historically takes many years to resolve, it is very difficult to estimate the timing of resolution of these matters; however, it is possible that certain of these matters may be resolved within the near term. The company is vigorously defending against the proceedings.
|
|
|
|
•
|
On September 1, 2010, CADE (Brazilian Administrative Council for Economic Defense) announced alleged anticompetitive activity on the part of five industrial gas companies in Brazil and imposed fines. Originally, CADE imposed a civil fine of
R$2.2 billion
Brazilian reais (
$574 million
) on White Martins, the Brazil-based subsidiary of Praxair, Inc. The fine was reduced to
R$1.7 billion
Brazilian reais (
$444 million
) due to a calculation error made by CADE. On September 14, 2015, the fine against White Martins was overturned by the Ninth Federal Court of Brasilia. CADE appealed this decision on June 30, 2016.
|
Similarly, on September 1, 2010, CADE imposed a civil fine of
R$237 million
Brazilian reais (
$62 million
) on Linde Gases Ltda., the former Brazil-based subsidiary of Linde AG, which was divested to MG Industries GmbH on March 1, 2019 and with respect to which Linde provided a contractual indemnity. The fine was reduced to
R$188 million
Brazilian reais (
$49 million
) due to a calculation error made by CADE. On May 6, 2014 the fine against Linde Gases Ltda. was overturned by the Seventh Federal Court in Brasilia. CADE appealed this decision on October 27, 2016.
Linde has strong defenses and is confident that it will prevail on appeal and have the fines overturned. Linde strongly believes that the allegations of anticompetitive activity against our current and former Brazilian subsidiaries are not supported by valid and sufficient evidence. Linde believes that this decision will not stand up to judicial review and deems the possibility of cash outflows to be extremely unlikely. As a result, no reserves have been recorded as management does not believe that a loss from this case is probable.
|
|
|
|
•
|
On and after April 23, 2019 former shareholders of Linde AG filed appraisal proceedings at the District Court (
Landgericht
) Munich I (Germany), seeking an increase of the cash consideration paid in connection with the previously completed cash merger squeeze-out of all of Linde AG’s minority shareholders for
€189.46
per share. Any such increase would apply to all
14,763,113
Linde AG shares that were outstanding on April 8, 2019, when the cash merger squeeze-out was completed. The period for plaintiffs to file claims expired on July 9, 2019. The company believes the consideration paid was fair and that the claims lack merit, and no reserve has been established. We cannot estimate the timing of resolution.
|
13. Segments
Effective October 31, 2018, Praxair and Linde AG completed the previously announced merger pursuant to the Merger Agreement, resulting in the formation of Linde plc (see Note 1 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/other. 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/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
three
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, inter-company 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 quarters and six months ended
June 30, 2019
and
2018
. Prior periods presented have been recast to be consistent with the new segment structure:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
SALES
(a)
|
|
|
|
|
|
|
|
|
Americas
|
$
|
2,779
|
|
|
$
|
1,865
|
|
|
$
|
5,485
|
|
|
$
|
3,715
|
|
|
EMEA
|
1,673
|
|
|
435
|
|
|
3,355
|
|
|
850
|
|
|
APAC
|
1,513
|
|
|
460
|
|
|
2,965
|
|
|
895
|
|
|
Engineering
|
752
|
|
|
—
|
|
|
1,388
|
|
|
—
|
|
|
Other
|
487
|
|
|
284
|
|
|
955
|
|
|
567
|
|
|
Total sales
|
$
|
7,204
|
|
|
$
|
3,044
|
|
|
$
|
14,148
|
|
|
$
|
6,027
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
Six Months Ended June 30,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
2019
|
|
2018
|
|
SEGMENT OPERATING PROFIT
|
|
|
|
|
|
|
|
|
Americas
|
$
|
646
|
|
|
$
|
510
|
|
|
$
|
1,231
|
|
|
$
|
993
|
|
|
EMEA
|
332
|
|
|
93
|
|
|
679
|
|
|
180
|
|
|
APAC
|
310
|
|
|
108
|
|
|
588
|
|
|
214
|
|
|
Engineering
|
99
|
|
|
—
|
|
|
177
|
|
|
—
|
|
|
Other
|
(62
|
)
|
|
2
|
|
|
(121
|
)
|
|
(2
|
)
|
|
Segment operating profit
|
1,325
|
|
|
713
|
|
|
2,554
|
|
|
1,385
|
|
|
Cost reduction programs and other charges (Note 3)
|
(141
|
)
|
|
(24
|
)
|
|
(230
|
)
|
|
(43
|
)
|
|
Purchase accounting impacts - Linde AG
|
(515
|
)
|
|
—
|
|
|
(1,046
|
)
|
|
—
|
|
|
Total operating profit
|
$
|
669
|
|
|
$
|
689
|
|
|
$
|
1,278
|
|
|
$
|
1,342
|
|
|
|
|
|
(a)
|
Sales reflect external sales only. Intersegment sales were not material.
|
14. Equity
Equity
A summary of the changes in total equity for the quarter and
six
months ended
June 30, 2019
and
2018
is provided below:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Quarter Ended June 30,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
Activity
|
Linde plc
Shareholders’
Equity
|
|
Noncontrolling
Interests (a)
|
|
Total
Equity
|
|
Linde plc
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
|
Balance, beginning of period
|
$
|
51,175
|
|
|
$
|
5,457
|
|
|
$
|
56,632
|
|
|
$
|
6,368
|
|
|
$
|
516
|
|
|
$
|
6,884
|
|
|
Net income (b)
|
522
|
|
|
29
|
|
|
551
|
|
|
480
|
|
|
18
|
|
|
498
|
|
|
Other comprehensive income (loss)
|
(142
|
)
|
|
(21
|
)
|
|
(163
|
)
|
|
(616
|
)
|
|
(21
|
)
|
|
(637
|
)
|
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions (reductions) (a)
|
—
|
|
|
(3,074
|
)
|
|
(3,074
|
)
|
|
—
|
|
|
1
|
|
|
1
|
|
|
Dividends and other capital changes
|
—
|
|
|
(76
|
)
|
|
(76
|
)
|
|
—
|
|
|
(13
|
)
|
|
(13
|
)
|
|
Redemption value adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
—
|
|
|
—
|
|
|
Dividends to Linde plc ordinary share holders ($0.875 per share in 2019 and $0.825 per share in 2018)
|
(474
|
)
|
|
—
|
|
|
(474
|
)
|
|
(237
|
)
|
|
—
|
|
|
(237
|
)
|
|
Issuances of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
For the dividend reinvestment and stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
1
|
|
|
—
|
|
|
1
|
|
|
For employee savings and incentive plans
|
(13
|
)
|
|
—
|
|
|
(13
|
)
|
|
15
|
|
|
—
|
|
|
15
|
|
|
Purchases of common stock
|
(526
|
)
|
|
—
|
|
|
(526
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Share-based compensation
|
22
|
|
|
—
|
|
|
22
|
|
|
17
|
|
|
—
|
|
|
17
|
|
|
Balance, end of period
|
$
|
50,564
|
|
|
$
|
2,315
|
|
|
$
|
52,879
|
|
|
$
|
6,027
|
|
|
$
|
501
|
|
|
$
|
6,528
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Six Months Ended June 30,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
Activity
|
Linde plc
Shareholders’
Equity
|
|
Noncontrolling
Interests (a)
|
|
Total
Equity
|
|
Linde plc
Shareholders’
Equity
|
|
Noncontrolling
Interests
|
|
Total
Equity
|
|
Balance, beginning of period
|
$
|
51,596
|
|
|
$
|
5,484
|
|
|
$
|
57,080
|
|
|
$
|
6,018
|
|
|
$
|
493
|
|
|
$
|
6,511
|
|
|
Net income (b)
|
1,039
|
|
|
65
|
|
|
1,104
|
|
|
942
|
|
|
27
|
|
|
969
|
|
|
Other comprehensive income (loss)
|
79
|
|
|
(88
|
)
|
|
(9
|
)
|
|
(498
|
)
|
|
(10
|
)
|
|
(508
|
)
|
|
Noncontrolling interests:
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions (reductions) (a)
|
—
|
|
|
(3,066
|
)
|
|
(3,066
|
)
|
|
—
|
|
|
7
|
|
|
7
|
|
|
Dividends and other capital changes
|
—
|
|
|
(80
|
)
|
|
(80
|
)
|
|
—
|
|
|
(16
|
)
|
|
(16
|
)
|
|
Redemption value adjustments
|
—
|
|
|
—
|
|
|
—
|
|
|
(2
|
)
|
|
—
|
|
|
(2
|
)
|
|
Dividends to Linde plc ordinary share holders ($1.75 per share in 2019 and $1.65 per share in 2018)
|
(951
|
)
|
|
—
|
|
|
(951
|
)
|
|
(474
|
)
|
|
—
|
|
|
(474
|
)
|
|
Issuances of common stock:
|
—
|
|
|
—
|
|
|
—
|
|
|
|
|
|
|
|
|
For the dividend reinvestment and stock purchase plan
|
—
|
|
|
—
|
|
|
—
|
|
|
3
|
|
|
—
|
|
|
3
|
|
|
For employee savings and incentive plans
|
(7
|
)
|
|
—
|
|
|
(7
|
)
|
|
18
|
|
|
—
|
|
|
18
|
|
|
Purchases of common stock
|
(1,230
|
)
|
|
—
|
|
|
(1,230
|
)
|
|
(1
|
)
|
|
—
|
|
|
(1
|
)
|
|
Share-based compensation
|
38
|
|
|
—
|
|
|
38
|
|
|
21
|
|
|
—
|
|
|
21
|
|
|
Balance, end of period
|
$
|
50,564
|
|
|
$
|
2,315
|
|
|
$
|
52,879
|
|
|
$
|
6,027
|
|
|
$
|
501
|
|
|
$
|
6,528
|
|
(a) As of the beginning of both periods, noncontrolling interests included approximately
$3.2 billion
relating to the
8%
of Linde AG shares which were not tendered in the Exchange Offer and were intended to be the subject of a cash-merger squeeze-out. On April 8, 2019 Linde AG completed the merger squeeze-out of all of its minority shares.
(b) Net income for noncontrolling interests excludes net income related to redeemable noncontrolling interests which is not significant for the quarter and
$1 million
for the
six months ended June 30, 2019
(
$1 million
and
$2 million
for the quarter and six months ended
June 30, 2018
), which is not part of total equity.
The components of AOCI are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
June 30,
|
|
December 31,
|
|
(Millions of dollars)
|
2019
|
|
2018
|
|
Cumulative translation adjustment - net of taxes:
|
|
|
|
|
Americas
|
$
|
(3,258
|
)
|
|
$
|
(3,375
|
)
|
|
EMEA
|
(138
|
)
|
|
105
|
|
|
APAC
|
(123
|
)
|
|
(114
|
)
|
|
Engineering
|
21
|
|
|
40
|
|
|
Other
|
(34
|
)
|
|
(246
|
)
|
|
|
(3,532
|
)
|
|
(3,590
|
)
|
|
Derivatives - net of taxes
|
(18
|
)
|
|
(2
|
)
|
|
Unrealized gain (loss) on securities
|
—
|
|
|
(1
|
)
|
|
Pension / OPEB funded status obligation (net of $275 million and $292 million tax benefit in June 30, 2019 and December 31, 2018, respectively)
|
(827
|
)
|
|
(863
|
)
|
|
|
$
|
(4,377
|
)
|
|
$
|
(4,456
|
)
|
15. Revenue Recognition
Revenue is accounted for in accordance with ASC 606. Revenue is recognized as control of goods or services are transferred to customers in an amount that reflects the consideration to which an entity expects to be entitled to receive in exchange for the goods or services.
Contracts with Customers
Approximately
83%
of Linde's consolidated sales are generated from industrial gases and related products in
three
geographic segments (Americas, APAC, and EMEA) and the remaining
17%
is related primarily to the Engineering segment, and to a lesser extent Other (see Note 13 for operating segment details). Linde serves a diverse group of industries including healthcare, energy, manufacturing, food, beverage carbonation, fiber-optics, steel making, aerospace, chemicals and water treatment.
Industrial Gases
Within each of the company’s geographic segments for industrial gases, there are three basic distribution methods: (i) on-site or tonnage; (ii) merchant or bulk liquid; and (iii) packaged or cylinder gases. The distribution method used by Linde to supply a customer is determined by many factors, including the customer’s volume requirements and location. The distribution method generally determines the contract terms with the customer and, accordingly, the revenue recognition accounting practices. Linde'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). These products are generally sold through one of the three distribution methods.
Following is a description of each of the three industrial gases distribution methods and the respective revenue recognition policies
:
On-site.
Customers that require the largest volumes of product and that have a relatively constant demand pattern are supplied by cryogenic and process gas on-site plants. Linde constructs plants on or adjacent to these customers’ sites and supplies the product directly to customers by pipeline. Where there are large concentrations of customers, a single pipeline may be connected to several plants and customers. On-site product supply contracts generally are total requirement contracts with terms typically ranging from
10
-
20 years
and contain minimum purchase requirements and price escalation provisions. Many of the cryogenic on-site plants also produce liquid products for the merchant market. Therefore, plants are typically not dedicated to a single customer. Additionally, Linde is responsible for the design, construction, operations and maintenance of the plants and our customers typically have no involvement in these activities. Advanced air separation processes also allow on-site delivery to customers with smaller volume requirements.
The company’s performance obligations related to on-site customers are satisfied over time as customers receive and obtain control of the product. Linde has elected to apply the practical expedient for measuring progress towards the completion of a performance obligation and recognizes revenue as the company has the right to invoice each customer, which generally corresponds with product delivery. Accordingly, revenue is recognized when product is delivered to the customer and the company has the right to invoice the customer in accordance with the contract terms. Consideration in these contracts is generally based on pricing which fluctuates with various price indices. Variable components of consideration exist within on-site contracts but are considered constrained.
Merchant.
Merchant deliveries generally are made from Linde's plants by tanker trucks to storage containers at the customer's site. Due to the relatively high distribution cost, merchant oxygen and nitrogen generally have a relatively small distribution radius from the plants at which they are produced. Merchant argon, hydrogen and helium can be shipped much longer distances. The customer agreements used in the merchant business are usually three-to seven-year supply agreements based on the requirements of the customer. These contracts generally do not contain minimum purchase requirements or volume commitments.
The company’s performance obligations related to merchant customers are generally satisfied at a point in time as the customers receive and obtain control of the product. Revenue is recognized when product is delivered to the customer and the company has the right to invoice the customer in accordance with the contract terms. Any variable components of consideration within merchant contracts are constrained however this consideration is not significant.
Packaged Gases.
Customers requiring small volumes are supplied products in containers called cylinders, under medium to high pressure. Linde distributes merchant gases from its production plants to company-owned cylinder filling plants where cylinders are then filled for distribution to customers. Cylinders may be delivered to the customer’s site or picked up by the customer at a packaging facility or retail store. Linde invoices the customer for the industrial gases and the use of the cylinder container(s). The company also sells hardgoods and welding equipment purchased from independent manufacturers. Packaged gases are generally sold under one to three-year supply contracts and purchase orders and do not contain minimum purchase requirements or volume commitments.
The company’s performance obligations related to packaged gases are satisfied at a point in time. Accordingly, revenue is recognized when product is delivered to the customer or when the customer picks up product from a packaged gas facility or retail store, and
the company has the right to payment from the customer in accordance with the contract terms. Any variable consideration is constrained and will be recognized when the uncertainty related to the consideration is resolved.
Linde Engineering
The company designs and manufactures equipment for air separation and other industrial gas applications manufactured specifically for end customers. Sale of equipment contracts are generally comprised of a single performance obligation. 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.
Contract Assets and Liabilities
Contract assets and liabilities result from differences in timing of revenue recognition and customer invoicing. Contract assets primarily relate to sale of equipment contracts for which revenue is recognized over time. The balance represents unbilled revenue which occurs when revenue recognized under the measure of progress exceeds amounts invoiced to customers. Customer invoices may be based on the passage of time, the achievement of certain contractual milestones or a combination of both criteria. Contract liabilities include advance payments or right to consideration prior to performance under the contract. Contract liabilities are recognized as revenue as performance obligations are satisfied under contract terms. Linde has contract assets of
$405 million
and
$283 million
at
June 30, 2019
and December 31, 2018, respectively. Total contract liabilities are
$1,880 million
at
June 30, 2019
(current of
$1,682 million
and
$198 million
within other long-term liabilities in the condensed consolidated balance sheets). Total contract liabilities were
$1,934 million
at December 31, 2018 (current contract liabilities of
$1,546 million
,
$234 million
classified as deferred income within other current liabilities and
$154 million
in other long-term liabilities in the condensed consolidated balance sheets). Revenue recognized for the six months ended June 30, 2019 that was included in the contract liability at December 31, 2018 was
$780 million
.Contract assets and liabilities primarily relate to the Linde Engineering business acquired in the merger. The industrial gases business does not have material contract assets or liabilities.
Payment Terms and Other
Linde generally receives payment after performance obligations are satisfied, and customer prepayments are not typical for the gases business. Payment terms vary based on the country where sales originate and local customary payment practices. Linde does not offer extended financing outside of customary payment terms. Contract asset and liability balances and the changes in these balances are not material. Amounts billed for sales and use taxes, value-added taxes, and certain excise and other specific transactional taxes imposed on revenue producing transactions are presented on a net basis and are not included in sales within the consolidated statement of income. Additionally, sales returns and allowances are not a normal practice in the industry and are not significant.
Disaggregated Revenue Information
As described above and in Note 20 to Linde's
2018
Form 10-K, the company manages its industrial gases business on a geographic basis, while the Engineering and Other businesses are generally managed on a global basis. Furthermore, the company believes that reporting sales by distribution method by reportable geographic segment best illustrates the nature, timing, type of customer, and contract terms for its revenues, including terms and pricing.
The following tables show sales by distribution method at the consolidated level and for each reportable segment and Other for the quarter and six months ended
June 30, 2019
and
June 30, 2018
.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Quarter Ended June 30, 2019
|
|
Sales
|
Americas
|
EMEA
|
APAC
|
Engineering
|
Other
|
Total
|
%
|
|
|
|
|
|
|
|
|
|
|
Merchant
|
$
|
735
|
|
$
|
476
|
|
$
|
551
|
|
$
|
—
|
|
$
|
53
|
|
$
|
1,815
|
|
25
|
%
|
|
On-Site
|
699
|
|
355
|
|
534
|
|
—
|
|
—
|
|
1,588
|
|
22
|
%
|
|
Packaged Gas
|
1,315
|
|
842
|
|
386
|
|
—
|
|
6
|
|
2,549
|
|
36
|
%
|
|
Other
|
30
|
|
—
|
|
42
|
|
752
|
|
428
|
|
1,252
|
|
17
|
%
|
|
|
$
|
2,779
|
|
$
|
1,673
|
|
$
|
1,513
|
|
$
|
752
|
|
$
|
487
|
|
$
|
7,204
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Quarter Ended June 30, 2018
|
|
Sales
|
Americas
|
EMEA
|
APAC
|
Engineering
|
Other
|
Total
|
%
|
|
|
|
|
|
|
|
|
|
|
Merchant
|
$
|
697
|
|
$
|
153
|
|
$
|
156
|
|
$
|
—
|
|
$
|
31
|
|
$
|
1,037
|
|
34
|
%
|
|
On-Site
|
559
|
|
78
|
|
248
|
|
—
|
|
—
|
|
885
|
|
29
|
%
|
|
Packaged Gas
|
601
|
|
202
|
|
54
|
|
—
|
|
—
|
|
857
|
|
28
|
%
|
|
Other
|
8
|
|
2
|
|
2
|
|
—
|
|
253
|
|
265
|
|
9
|
%
|
|
|
$
|
1,865
|
|
$
|
435
|
|
$
|
460
|
|
$
|
—
|
|
$
|
284
|
|
$
|
3,044
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Six Months Ended June 30, 2019
|
|
Sales
|
Americas
|
EMEA
|
APAC
|
Engineering
|
Other
|
Total
|
%
|
|
|
|
|
|
|
|
|
|
|
Merchant
|
$
|
1,439
|
|
$
|
903
|
|
$
|
1,048
|
|
$
|
—
|
|
$
|
84
|
|
$
|
3,474
|
|
25
|
%
|
|
On-Site
|
1,402
|
|
732
|
|
1,064
|
|
—
|
|
—
|
|
3,198
|
|
22
|
%
|
|
Packaged Gas
|
2,602
|
|
1,716
|
|
779
|
|
—
|
|
6
|
|
5,103
|
|
36
|
%
|
|
Other
|
42
|
|
4
|
|
74
|
|
1,388
|
|
865
|
|
2,373
|
|
17
|
%
|
|
|
$
|
5,485
|
|
$
|
3,355
|
|
$
|
2,965
|
|
$
|
1,388
|
|
$
|
955
|
|
$
|
14,148
|
|
100
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Six Months Ended June 30, 2018
|
|
Sales
|
Americas
|
EMEA
|
APAC
|
Engineering
|
Other
|
Total
|
%
|
|
|
|
|
|
|
|
|
|
|
Merchant
|
$
|
1,375
|
|
$
|
300
|
|
$
|
295
|
|
$
|
—
|
|
$
|
62
|
|
$
|
2,032
|
|
34
|
%
|
|
On-Site
|
1,135
|
|
159
|
|
492
|
|
—
|
|
—
|
|
1,786
|
|
29
|
%
|
|
Packaged Gas
|
1,192
|
|
386
|
|
105
|
|
—
|
|
—
|
|
1,683
|
|
28
|
%
|
|
Other
|
13
|
|
5
|
|
3
|
|
—
|
|
505
|
|
526
|
|
9
|
%
|
|
|
$
|
3,715
|
|
$
|
850
|
|
$
|
895
|
|
$
|
—
|
|
$
|
567
|
|
$
|
6,027
|
|
100
|
%
|
Remaining Performance Obligations
As described above, Linde's contracts with on-site customers are under long-term supply arrangements which generally require the customer to purchase their requirements from Linde and also have minimum purchase requirements. The company estimates the consideration related to minimum purchase requirements is approximately
$46 billion
. This amount excludes all sales above minimum purchase requirements, which can be significant depending on customer needs. In the future, actual amounts will be different due to impacts from several factors, many of which are beyond the company’s control including, but not limited to, timing of newly signed, terminated and renewed contracts, inflationary price escalations, currency exchange rates, and pass-through costs related to natural gas and electricity. The actual duration of long-term supply contracts ranges up to twenty years. The company estimates that approximately half of the revenue related to minimum purchase requirements are estimated to be earned in the next five years and the remaining thereafter.
16. Leases
In the normal course of its business, Linde enters into various leases as the lessee, primarily involving manufacturing and distribution equipment and office space. Total lease and rental expenses related to operating lease right of use assets for the quarter and
six months ended June 30, 2019
was
$88 million
and
$182 million
, respectively. Operating leases costs are included in selling, general and administrative expenses and cost of sales, exclusive of depreciation and amortization. The related assets and obligations are included in other long term assets and other current liabilities and other long term liabilities, respectively. Total lease and rental expenses related to finance lease right of use assets for the quarter and
six months ended June 30, 2019
were
$7 million
and
$13 million
, respectively and the costs are included in depreciation and amortization, and interest. Related assets and obligations are included in property, plant and equipment - net and debt, respectively
.
Linde includes renewal options that are reasonably certain to be exercised as part of the lease term. Operating and financing lease expenses above include short term and variable lease costs which are immaterial.
As most leases do not provide an implicit rate, Linde uses the applicable incremental borrowing rate at lease commencement to measure lease liabilities and right-of-use assets. Linde determines incremental borrowing rates through market sources.
The company has elected to apply the short-term lease exception for all underlying asset classes. Short-term leases are leases that, at the commencement date, have a lease term of twelve months or less and do not include a purchase option that the lessee is reasonably certain to exercise. Leases that meet the short-term lease definition are not recognized on the balance sheet, but rather expensed on a straight-line basis over the lease term.
Some leasing arrangements require variable payments that are dependent on usage, output, or may vary for other reasons, such as insurance. The company does not have material variable lease payments.
Gains and losses on sale and leaseback transactions were immaterial. Operating cash flows from operating leases for the quarter and
six months ended June 30, 2019
were
$85 million
and
$170 million
respectively. Cash flows from finance leases for the same period were immaterial.
Supplemental balance sheet information related to leases is as follows:
|
|
|
|
|
|
|
|
|
(Millions of dollars)
|
|
June 30, 2019
|
|
Operating leases
|
|
|
|
Operating lease right-of-use assets
|
$
|
998
|
|
|
|
|
|
Other current liabilities
|
249
|
|
|
Other long-term liabilities
|
715
|
|
|
Total operating lease liabilities
|
$
|
964
|
|
|
|
|
|
|
Finance leases
|
|
|
|
Finance lease right-of-use assets
|
$
|
113
|
|
|
|
|
|
Current portion of long-term debt
|
|
22
|
|
|
Long-term debt
|
110
|
|
|
Total finance lease liabilities
|
$
|
132
|
|
Supplemental operating lease information:
|
|
|
|
|
|
|
|
|
|
June 30, 2019
|
|
Weighted average lease term (years)
|
|
7 years
|
|
|
Weighted average discount rate
|
|
2.85
|
%
|
Future operating and financing lease payments as of
June 30, 2019
are as follows (millions of dollars):
|
|
|
|
|
|
|
|
|
|
|
|
|
Period
|
Operating Leases
|
|
Finance Leases
|
|
Remaining 2019
|
|
$
|
224
|
|
|
$
|
28
|
|
|
2020
|
|
228
|
|
|
24
|
|
|
2021
|
|
182
|
|
|
19
|
|
|
2022
|
|
139
|
|
|
15
|
|
|
2023
|
|
92
|
|
|
6
|
|
|
Thereafter
|
|
276
|
|
|
68
|
|
|
Total future undiscounted lease payments
|
|
$
|
1,141
|
|
|
$
|
160
|
|
|
Less imputed interest
|
|
(177
|
)
|
|
(28
|
)
|
|
Total reported lease liability
|
|
$
|
964
|
|
|
$
|
132
|
|
Prior to the adoption of the new lease accounting standard, operating and finance lease commitments on an undiscounted basis were approximately
$1.3 billion
and
$104 million
, respectively, at
December 31, 2018
under long-term non-cancelable leases. The amounts payable for operating leases were as follows:
|
|
|
|
|
|
|
|
(Millions of dollars)
|
Operating Leases
|
|
2019
|
$
|
305
|
|
|
2020
|
236
|
|
|
2021
|
186
|
|
|
2022
|
145
|
|
|
2023
|
102
|
|
|
Thereafter
|
326
|
|
|
|
$
|
1,300
|
|
In limited instances Linde acts as a lessor, primarily for assets to provide industrial gas to specific customers. These leases are not significant to the condensed consolidated balance sheets or consolidated statements of income.
17. Merger-related Divestitures, Discontinued Operations and Net Assets Held for Sale
As described in Note 1, as a condition of the European Commission ("EC"), the U.S. Department of Justice ("DOJ"), and other governmental regulatory authorities approval of the merger, Linde plc, Praxair and Linde AG were required to divest the following businesses:
Praxair Merger-Related Divestitures - Primarily European Industrial Gases Business
As a condition of the EC regulatory approval of the merger transaction, Praxair agreed to sell the majority of its industrial gases business in Europe. The sale was completed on December 3, 2018 (see Note 4 to Linde's 2018 Form 10-K).
Additionally, to satisfy regulatory requirements in other jurisdictions, Praxair agreed to sell certain operations in Chile, China, India and South Korea. The Chilean business was sold as part of the Linde AG Americas SPA (as defined below), the select Indian assets were sold in July 2019, and other sales are expected during 2019. Effective October 22, 2018, the date of final regulatory approvals, these businesses have been accounted for as assets held for sale on the condensed consolidated balance sheets. These businesses were evaluated for discontinued operations accounting treatment under U.S. GAAP and it was determined that they did not meet the definition of a discontinued operation as these transactions did not represent a strategic shift with a major effect, after considering the impact of the merger.
Linde AG Merger-Related Divestitures - Primarily Americas Industrial Gases Business
As a condition of the U.S. regulatory approval of the merger, Linde AG agreed to sell the majority of its industrial gases business in the Americas, as described below:
|
|
|
|
•
|
The Linde AG Americas Sales and Purchase Agreement, dated July 16, 2018, as and further amended on September 22, 2018, October 19, 2018, and February 20, 2019 whereby Linde AG and Praxair, Inc. entered into an agreement with a consortium comprising companies of the German industrial gases manufacturer Messer Group and CVC Capital Partners Fund VII to sell the majority of Linde AG’s industrial gases business in North America and certain industrial gases business activities of Linde AG's in South America for approximately
$2.9 billion
in net cash consideration after purchase price adjustments for certain items relating to assets and liabilities of the sold businesses. In addition, divestitures include approximately
$0.5 billion
of proceeds for incremental plant sales within the Americas under other agreements. These transactions were completed on March 1, 2019.
|
Additionally, on April 30, 2019, Linde completed the sale of selected assets of Linde Korea to IMM Private Equity Inc., to satisfy requirements of the Korea Fair Trade Commission. The assets divested include bulk and on-site business in Giheung, Pohang and Seosansites as well as oxygen and nitrogen on-site generators. The sale price of
$1.2 billion
will be subject to customary adjustments.
The net carrying value of Linde AG's Americas business assets and liabilities divested on March 1, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Millions of dollars
|
|
Carrying Value
|
|
Assets
|
|
|
|
Cash and cash equivalents
|
|
$
|
200
|
|
|
Accounts receivable – net
|
|
479
|
|
|
Inventories
|
|
181
|
|
|
Prepaid and other current assets
|
|
409
|
|
|
Property, plant and equipment – net
|
|
1,590
|
|
|
Equity investments
|
|
37
|
|
|
Goodwill
|
|
3
|
|
|
Other intangible assets – net
|
|
10
|
|
|
Other long-term assets
|
|
76
|
|
|
Asset adjustments for estimated fair value
|
|
1,650
|
|
|
Total Assets Divested
|
|
$
|
4,635
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
|
$
|
94
|
|
|
Accrued taxes
|
|
60
|
|
|
Other current liabilities
|
|
767
|
|
|
Long-term debt
|
|
2
|
|
|
Other long-term liabilities
|
|
98
|
|
|
Deferred credits
|
|
177
|
|
|
Total Liabilities Divested
|
|
$
|
1,198
|
|
|
Cumulative translation adjustment, net of taxes
|
|
12
|
|
|
Net Assets Divested
|
|
$
|
3,449
|
|
The net carrying value of Linde AG's South Korean business assets and liabilities divested on April 30, 2019 is presented below:
|
|
|
|
|
|
|
|
|
Millions of dollars
|
|
Carrying Value
|
|
Assets
|
|
|
|
Accounts receivable – net
|
|
$
|
27
|
|
|
Inventories
|
|
16
|
|
|
Property, plant and equipment – net
|
|
389
|
|
|
Asset adjustments for estimated fair value
|
|
879
|
|
|
Total Assets Divested
|
|
$
|
1,311
|
|
|
Liabilities
|
|
|
|
Accounts payable
|
|
$
|
2
|
|
|
Accrued taxes
|
|
12
|
|
|
Other current liabilities
|
|
29
|
|
|
Long-term debt
|
|
6
|
|
|
Other long-term liabilities
|
|
3
|
|
|
Deferred credits
|
|
31
|
|
|
Total Liabilities Divested
|
|
$
|
83
|
|
|
Cumulative translation adjustment, net of taxes
|
|
—
|
|
|
Net Assets Divested
|
|
$
|
1,228
|
|
Discontinued Operations
Only the sales of the Linde AG merger-related divestitures meet the criteria for discontinued operations, Praxair merger-related divestitures do not qualify as discontinued operations. As such, operations related to the Linde AG merger-related divestitures are included within Income from discontinued operations, net of tax for periods subsequent to the merger until the respective sale transactions are completed, as summarized below:
|
|
|
|
|
|
|
|
|
|
|
|
Millions of dollars
|
Quarter Ended June 30, 2019
|
|
Six Months Ended June 30, 2019
|
|
Net sales
|
$
|
15
|
|
|
$
|
430
|
|
|
Cost of sales
|
4
|
|
|
242
|
|
|
Other operating costs
|
—
|
|
|
43
|
|
|
Operating profit
|
$
|
11
|
|
|
$
|
145
|
|
|
Income from equity investments
|
2
|
|
|
4
|
|
|
Income taxes
|
4
|
|
|
51
|
|
|
Income from discontinued operations, net of tax
|
$
|
9
|
|
|
$
|
98
|
|
|
Noncontrolling interests
|
—
|
|
|
(7
|
)
|
|
Income from discontinued operations, net of tax and noncontrolling interests
|
$
|
9
|
|
|
$
|
91
|
|
For the quarter and
six months ended June 30, 2019
there were no material amounts of depreciation, amortization, capital expenditures, or significant operating or investing non-cash items related to discontinued operations.
Net Assets Held for Sale
Net assets held for sale includes both the Linde AG merger-related divestitures that meet the criteria for discontinued operations and the Praxair merger-related divestitures that do not. As of
June 30, 2019
and December 31, 2018, the following assets and liabilities are reported as components of the net assets held for sale in the condensed consolidated balance sheets:
|
|
|
|
|
|
|
|
|
|
|
|
Millions of dollars
|
June 30, 2019
|
|
December 31, 2018
|
|
Assets
|
|
|
|
|
Cash and cash equivalents
|
$
|
7
|
|
|
$
|
182
|
|
|
Accounts receivable – net
|
27
|
|
|
297
|
|
|
Inventories
|
2
|
|
|
209
|
|
|
Prepaid and other current assets
|
1
|
|
|
54
|
|
|
Property, plant and equipment – net
|
79
|
|
|
2,005
|
|
|
Other Assets
|
42
|
|
|
187
|
|
|
Asset adjustments for estimated fair value (Note 4)
|
125
|
|
|
2,564
|
|
|
Total Assets Classified as Assets Held for Sale
|
$
|
283
|
|
|
$
|
5,498
|
|
|
Liabilities
|
|
|
|
|
Accounts payable
|
2
|
|
|
125
|
|
|
Deferred credits
|
4
|
|
|
206
|
|
|
Other liabilities
|
5
|
|
|
437
|
|
|
Total Liabilities Classified as Assets Held for Sale
|
11
|
|
|
768
|
|
|
Net Assets Classified as Held for Sale
|
$
|
272
|
|
|
$
|
4,730
|
|
18. Subsequent Events
Linde India Divestiture
On July 12, 2019 Linde completed the sale of selected assets of Linde India, in accordance with the recent merger between Linde AG and Praxair, Inc. and the Competition Commission of India. The sale price of
$218 million
will be subject to customary adjustments.