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Table of Contents                

 
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2020
or
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from             to
Commission file number
001-38730
LINDE PLC
(Exact name of registrant as specified in its charter)
Ireland
 
 
 
 
98-1448883
(State or other jurisdiction of incorporation)
 
 
 
(I.R.S. Employer Identification No.)
 
The Priestley Centre
 
 
10 Priestley Road,
 
 
Surrey Research Park,
 
 
Guildford,
Surrey
 GU2 7XY
 
 
United Kingdom
 
 
(Address of principal executive offices) (Zip Code)
 
 
+44
14
83 242200
 
(Registrant's telephone number, including area code)
N/A
(Former name, former address and former fiscal year, if changed since last report)

Securities registered pursuant to Section 12(b) of the Act:
Title of each class
 
Trading symbol(s)
 
Name of each exchange on which registered
Ordinary shares (€0.001 nominal value per share)
 
LIN
 
New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes       No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of RegulationS-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).     Yes       No  

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
 
Accelerated filer
 
 
 
 
 
Non-accelerated filer
 
Smaller reporting company
 
 
 
 
Emerging growth company
 
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes       No 
At April 30, 2020, 525,185,319 ordinary shares (€0.001 par value) of the Registrant were outstanding.
 


Table of Contents                

INDEX
 
 
PART I - FINANCIAL INFORMATION
 
 
 
 
Item 1.
Financial Statements (unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
 
 
 
Item 1.
 
 
 
Item 1A.
 
 
 
Item 2.
 
 
 
Item 3.
 
 
 
Item 4.
 
 
 
Item 5.
 
 
 
Item 6.
 
 
 
 



Table of Contents                

Forward-looking Statements

This document contains “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements are identified by terms and phrases such as: anticipate, believe, intend, estimate, expect, continue, should, could, may, plan, project, predict, will, potential, forecast, and similar expressions. They are based on management’s reasonable expectations and assumptions as of the date the statements are made but involve risks and uncertainties. These risks and uncertainties include, without limitation: that Linde plc may be unable to achieve expected synergies from the business combination of Praxair and Linde AG or that it may take longer or be more costly than expected to achieve those synergies; the performance of stock markets generally; developments in worldwide and national economies and other international events and circumstances, including trade conflicts and tariffs; changes in foreign currencies and in interest rates; the cost and availability of electric power, natural gas and other raw materials; the ability to achieve price increases to offset cost increases; catastrophic events including natural disasters, epidemics and acts of war and terrorism; the ability to attract, hire, and retain qualified personnel; the impact of changes in financial accounting standards; the impact of changes in pension plan liabilities; the impact of tax, environmental, healthcare and other legislation and government regulation in jurisdictions in which the company operates; the cost and outcomes of investigations, litigation and regulatory proceedings; the impact of potential unusual or non-recurring items; continued timely development and market acceptance of new products and applications; the impact of competitive products and pricing; future financial and operating performance of major customers and industries served; the impact of information technology system failures, network disruptions and breaches in data security; and the effectiveness and speed of integrating new acquisitions into the business. These risks and uncertainties may cause actual future results or circumstances to differ materially from accounting principles generally accepted in the United States of America, International Financial Reporting Standards or adjusted projections, estimates or other forward-looking statements.

Linde plc assumes no obligation to update or provide revisions to any forward-looking statement in response to changing circumstances. The above listed risks and uncertainties are further described in Item 1A. Risk Factors in Linde plc’s Form 10-K for the fiscal year ended December 31, 2019 filed with the SEC on March 2, 2020 and in Item 1A. of this report which should be reviewed carefully. Please consider Linde plc’s forward-looking statements in light of those risks.










3

Table of Contents                


LINDE PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(Millions of dollars, except per share data)
(UNAUDITED) 

 
Quarter Ended March 31,
 
2020
 
2019
Sales
$
6,739

 
$
6,944

Cost of sales, exclusive of depreciation and amortization
3,843

 
4,116

Selling, general and administrative
861

 
879

Depreciation and amortization
1,142

 
1,223

Research and development
44

 
46

Cost reduction programs and other charges
131

 
89

Other income (expense) - net
15

 
18

Operating Profit
733

 
609

Interest expense - net
24

 
23

Net pension and OPEB cost (benefit), excluding service cost
(45
)
 
15

Income From Continuing Operations Before Income Taxes and Equity Investments
754

 
571

Income taxes on continuing operations
165

 
140

Income From Continuing Operations Before Equity Investments
589

 
431

Income from equity investments
17

 
34

Income From Continuing Operations (Including Noncontrolling Interests)
606

 
465

Income from discontinued operations, net of tax
2

 
89

Net Income (Including Noncontrolling Interests)
608

 
554

Less: noncontrolling interests from continuing operations
(35
)
 
(30
)
Less: noncontrolling interest from discontinued operations

 
(7
)
Net Income – Linde plc
$
573

 
$
517

 
 
 
 
Net Income – Linde plc
 
 
 
Income from continuing operations
$
571

 
$
435

Income from discontinued operations
$
2

 
$
82

 
 
 
 
Per Share Data – Linde plc Shareholders
 
 
 
Basic earnings per share from continuing operations
$
1.07

 
$
0.80

Basic earnings per share from discontinued operations

 
0.15

Basic earnings per share
$
1.07

 
$
0.95

Diluted earnings per share from continuing operations
$
1.07

 
$
0.79

Diluted earnings per share from discontinued operations

 
0.15

Diluted earnings per share
$
1.07

 
$
0.94

 
 
 
 
Weighted Average Shares Outstanding (000’s):
 
 
 
Basic shares outstanding
531,215

 
545,554

Diluted shares outstanding
534,956

 
549,147


The accompanying notes are an integral part of these financial statements.


4

Table of Contents                

LINDE PLC AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(Millions of dollars)
(UNAUDITED)
 
 
Quarter Ended March 31,
 
2020
 
2019
NET INCOME (INCLUDING NONCONTROLLING INTERESTS)
$
608

 
$
554

 
 
 
 
OTHER COMPREHENSIVE INCOME (LOSS)
 
 
 
Translation adjustments:
 
 
 
Foreign currency translation adjustments
(2,740
)
 
123

Reclassification to net income

 
12

Income taxes
25

 
(3
)
Translation adjustments
(2,715
)
 
132

Funded status - retirement obligations (Note 8):
 
 
 
Retirement program remeasurements
58

 
(2
)
Reclassifications to net income
22

 
64

Income taxes
(15
)
 
(18
)
Funded status - retirement obligations
65

 
44

Derivative instruments (Note 5):
 
 
 
Current unrealized gain (loss)
(65
)
 
(17
)
Reclassifications to net income
24

 

Income taxes
11

 
3

Derivative instruments
(30
)
 
(14
)
   Securities:
 
 
 
Current unrealized gain (loss)

 
(8
)
Reclassifications to net income

 

Income taxes

 

Securities

 
(8
)
TOTAL OTHER COMPREHENSIVE INCOME (LOSS)
(2,680
)
 
154

 
 
 
 
COMPREHENSIVE INCOME (LOSS) (INCLUDING NONCONTROLLING INTERESTS)
(2,072
)
 
708

Less: noncontrolling interests
71

 
30

COMPREHENSIVE INCOME (LOSS) - LINDE PLC
$
(2,001
)
 
$
738


The accompanying notes are an integral part of these financial statements.





5

Table of Contents                

LINDE PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Millions of dollars)
(UNAUDITED)
 
 
March 31, 2020
 
December 31, 2019
Assets
 
 
 
Cash and cash equivalents
$
4,014

 
$
2,700

Accounts receivable - net
4,084

 
4,322

Contract assets
311

 
368

Inventories
1,689

 
1,697

Assets held for sale
160

 
125

Prepaid and other current assets
1,255

 
1,140

Total Current Assets
11,513

 
10,352

Property, plant and equipment - net
27,418

 
29,064

Goodwill
26,073

 
27,019

Other intangible assets - net
15,339

 
16,137

Other long-term assets
4,026

 
4,040

Total Assets
$
84,369

 
$
86,612

Liabilities and equity
 
 
 
Accounts payable
$
2,965

 
$
3,266

Short-term debt
4,848

 
1,732

Current portion of long-term debt
2,006

 
1,531

Contract liabilities
1,854

 
1,758

Liabilities of assets held for sale
45

 
2

Other current liabilities
3,772

 
3,871

Total Current Liabilities
15,490

 
12,160

Long-term debt
10,021

 
10,693

Other long-term liabilities
11,615

 
12,124

Total Liabilities
37,126

 
34,977

Redeemable noncontrolling interests
92

 
113

Linde plc Shareholders’ Equity:
 
 
 
Ordinary shares, €0.001 par value, authorized 1,750,000,000 shares, 2020 issued: 552,012,862 ordinary shares; 2019 issued: 552,012,862 ordinary shares
1

 
1

Additional paid-in capital
40,185

 
40,201

Retained earnings
16,850

 
16,842

Accumulated other comprehensive income (loss) (Note 11)
(7,388
)
 
(4,814
)
Less: Treasury stock, at cost (2020 – 26,845,143 shares and 2019 – 17,632,318 shares)
(4,872
)
 
(3,156
)
Total Linde plc Shareholders’ Equity
44,776

 
49,074

Noncontrolling interests
2,375

 
2,448

Total Equity
47,151

 
51,522

Total Liabilities and Equity
$
84,369

 
$
86,612

The accompanying notes are an integral part of these financial statements.

6

Table of Contents                

LINDE PLC AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Millions of dollars)
(UNAUDITED)
 
Three Months Ended March 31,
 
2020
 
2019
Increase (Decrease) in Cash and Cash Equivalents
 
 
 
Operations
 
 
 
Net income - Linde plc
$
573

 
$
517

Less: Income from discontinued operations, net of tax and noncontrolling interests
(2
)
 
(82
)
Add: Noncontrolling interests from continuing operations
35

 
30

Income from continuing operations (including noncontrolling interests)
606

 
465

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Cost reduction programs and other charges, net of payments
40

 
(167
)
Amortization of merger-related inventory step-up

 
10

Depreciation and amortization
1,142

 
1,223

Deferred income taxes
(107
)
 
(14
)
Share-based compensation
43

 
16

Working capital:
 
 
 
Accounts receivable
(109
)
 
(56
)
Inventory
(62
)
 
(32
)
Prepaid and other current assets
(92
)
 
(79
)
Payables and accruals
(183
)
 
(31
)
    Contract assets and liabilities, net
176

 
(84
)
Pension contributions
(17
)
 
(18
)
Long-term assets, liabilities and other
(90
)
 
(165
)
Net cash provided by operating activities
1,347

 
1,068

Investing
 
 
 
Capital expenditures
(803
)
 
(843
)
Acquisitions, net of cash acquired
(41
)
 
(152
)
Divestitures and asset sales, net of cash divested
231

 
3,455

Net cash provided by (used for) investing activities
(613
)
 
2,460

Financing
 
 
 
Short-term debt borrowings (repayments) - net
3,149

 
(533
)
Long-term debt borrowings
16

 
22

Long-term debt repayments
(53
)
 
(516
)
Issuances of ordinary shares
13

 
28

Purchases of ordinary shares
(1,828
)
 
(725
)
Cash dividends - Linde plc shareholders
(511
)
 
(477
)
Noncontrolling interest transactions and other
(27
)
 
(10
)
Net cash provided by (used for) financing activities
759

 
(2,211
)
Discontinued Operations
 
 
 
Cash provided by operating activities

 
63

Cash used for investing activities

 
(58
)
Cash provided by financing activities

 
5

Net cash provided by discontinued operations

 
10

Effect of exchange rate changes on cash and cash equivalents
(179
)
 
8

Change in cash and cash equivalents
1,314

 
1,335

Cash and cash equivalents, beginning-of-period
2,700

 
4,466

Cash and cash equivalents, including discontinued operations
4,014

 
5,801

Cash and cash equivalents of discontinued operations

 
(10
)
Cash and cash equivalents, end-of-period
$
4,014

 
$
5,791

The accompanying notes are an integral part of these financial statements.

7

Table of Contents                

INDEX TO NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Notes to Condensed Consolidated Financial Statements - Linde plc and Subsidiaries (Unaudited)
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 


8

Table of Contents                

1. 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 2019 Annual Report on Form 10-K. There have been no material changes to the company’s significant accounting policies during 2020.
Accounting Standards Implemented in 2020

Credit Losses on Financial Instruments –In June 2016, the FASB issued updated guidance 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 is effective for the company beginning in the first quarter 2020 and requires companies to apply the change in accounting on a modified retrospective basis. The adoption of the guidance had an immaterial impact on the consolidated financial statements.
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 is effective for the company beginning in the first quarter 2020. The adoption of the guidance had no impact on the consolidated financial statements.
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 adoption of the guidance had an immaterial impact on the consolidated financial statements.

Accounting Standards to be Implemented

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.

Reclassifications – Certain prior years’ amounts have been reclassified to conform to the current year’s presentation.

Other Developments

Linde has been actively monitoring the COVID-19 situation and its impact globally. Our priority has been the safety of our employees and the needs of our customers. The spread of COVID-19 has caused us to modify our business practices (including employee travel, employee work locations, and cancellation of physical participation in meetings and events), and we may take further actions as may be required by government authorities or that we determine are in the best interests of our employees, customers, suppliers and other stakeholders. The ultimate magnitude of COVID-19, including the extent of its impact on the Company’s operational results, which could be material, will be determined by the length of time that such circumstances continue, measures taken to prevent its spread, its effect on the supply chain and the demand for the Company’s products and services, as well as the effect of governmental and public actions taken in response.
2. Cost Reduction Programs and Other Charges

2020 Charges

Cost reduction programs and other charges were $131 million for the three months ended March 31, 2020 ($95 million after tax). The following table summarizes the activities related to the company's cost reduction charges for the three months ended March 31, 2020:

9

Table of Contents                

 
Quarter Ended March 31, 2020
(millions of dollars)
Severance costs
 
Other cost reduction charges
 
Total cost reduction program related charges
 
Merger-related and other charges
 
Total
Americas
$
6

 
$
15

 
$
21

 
$

 
$
21

EMEA
26

 

 
26

 
3

 
29

APAC
2

 
2

 
4

 
8

 
12

Engineering
14

 

 
14

 
1

 
15

Other
10

 
3

 
13

 
41

 
54

Total
$
58

 
$
20

 
$
78

 
$
53

 
$
131


Cost Reduction Programs

Total cost reduction program related charges were $78 million for the three months ended March 31, 2020 ($56 million after tax).

Severance costs

Severance costs of $58 million for the three months ended March 31, 2020 are for the elimination of approximately 600 positions, largely in the EMEA and Engineering segments, of which approximately 450 have terminated employment. The majority of these actions are anticipated to be completed by 2021.

Other cost reduction charges

Other cost reduction charges of $20 million for the three months ended March 31, 2020 are primarily charges related to the execution of the company's synergistic actions including location consolidations and business rationalization projects, software and process harmonization, and associated non-recurring costs.

Merger-related Costs and Other Charges

Linde incurred merger-related costs and other charges which totaled $53 million ($39 million after tax) for the three months ended March 31, 2020.

Cash Requirements

The total cash requirements of the cost reduction program and other charges during the three months ended March 31, 2020 are estimated to be approximately $74 million. Total cost reduction programs and other charges, net of payments in the condensed consolidated statements of cash flows for the three months ended March 31, 2020 also reflects the impact of cash payments of liabilities, including merger-related tax liabilities, accrued as of December 31, 2019.

The following table summarizes the activities related to the company's cost reduction related charges for the three months ended March 31, 2020:
(millions of dollars)
Severance costs
 
Other cost reduction charges
 
Total cost reduction program related charges
 
Merger-related and other charges
 
Total
Balance, December 31, 2019
$
117

 
$
16

 
$
133

 
$
67

 
$
200

2020 Cost Reduction Programs and Other Charges
58

 
20

 
78

 
53

 
131

Less: Cash payments
(24
)
 
(4
)
 
(28
)
 
(36
)
 
(64
)
Less: Non-cash charges

 
(15
)
 
(15
)
 
(39
)
 
(54
)
Foreign currency translation and other
(1
)
 

 
(1
)
 
(2
)
 
(3
)
Balance, March 31, 2020
$
150

 
$
17

 
$
167

 
$
43

 
$
210




2019 Charges


10

Table of Contents                

Cost reduction programs and other charges were $89 million for the quarter ended March 31, 2019 ($81 million after tax and noncontrolling interests), including merger-related costs of $56 million ($53 million after-tax) and synergy-related charges, primarily severance, of $33 million ($28 million after-tax).

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 10 - Segments, Linde excluded these costs from its management definition of segment operating profit; a reconciliation of segment operating profit to consolidated operating profit is shown within the segment operating profit table.
3. Supplemental Information
Receivables
For trade receivables an expected credit loss approach was adopted as of January 1, 2020. Linde applies loss rates that are lifetime expected credit losses at initial recognition of the receivables. These expected loss rates are based on an analysis of the actual historical default rates based on 2 years for each business, taking regional circumstances into account. If necessary, these historical default rates are adjusted to reflect the impact of current changes in the macroeconomic environment using forward-looking information. The loss rates are also critically evaluated based on the expectations of the responsible management team regarding the collectability of the receivables. Gross receivables aged less than one year were $4,177 million and $4,390 million at March 31, 2020 and December 31, 2019 respectively and gross receivables aged greater than one year were $261 million and $249 million at March 31, 2020 and December 31, 2019 respectively. Receivables aged greater than one year are generally fully reserved unless specific circumstances warrant exceptions.
Trade receivables net of reserves were $4,084 million at March 31, 2020 and $4,322 million at December 31, 2019. Allowances for expected credit losses were $363 at March 31, 2020 and $306 million at December 31, 2019.  Provisions for expected credit losses were $46 million and $56 million for the three months ended March 31, 2020 and 2019, respectively. The allowance activity in the three months ended March 31, 2020 related to write-offs of uncollectible amounts, net of recoveries and currency movements is not material.
Inventories
The following is a summary of Linde's consolidated inventories:
(Millions of dollars)
March 31,
2020
 
December 31,
2019
Inventories
 
 
 
Raw materials and supplies
$
374

 
$
396

Work in process
338

 
331

Finished goods
977

 
970

Total inventories
$
1,689

 
$
1,697





11

Table of Contents                

4. Debt
The following is a summary of Linde's outstanding debt at March 31, 2020 and December 31, 2019:
(Millions of dollars)
March 31,
2020
 
December 31,
2019
SHORT-TERM
 
 
 
Commercial paper and U.S. bank borrowings
$
3,994

 
$
996

Other bank borrowings (primarily international)
854

 
736

Total short-term debt
4,848

 
1,732

LONG-TERM (a)
 
 
 
(U.S. dollar denominated unless otherwise noted)
 
 
 
2.25% Notes due 2020
300

 
300

1.75% Euro denominated notes due 2020 (b)
1,113

 
1,137

0.634% Euro denominated notes due 2020
55

 
56

4.05% Notes due 2021
499

 
499

3.875% Euro denominated notes due 2021 (b)
694

 
711

3.00% Notes due 2021
499

 
499

0.250% Euro denominated notes due 2022 (b)
1,110

 
1,129

2.45% Notes due 2022
599

 
599

2.20% Notes due 2022
499

 
499

2.70% Notes due 2023
499

 
499

2.00% Euro denominated notes due 2023 (b)
761

 
776

5.875% GBP denominated notes due 2023 (b)
428

 
456

1.20% Euro denominated notes due 2024
605

 
615

1.875% Euro denominated notes due 2024 (b)
356

 
361

2.65% Notes due 2025
398

 
398

1.625% Euro denominated notes due 2025
547

 
556

3.20% Notes due 2026
725

 
725

3.434% Notes due 2026
196

 
196

1.652% Euro denominated notes due 2027
91

 
93

1.00% Euro denominated notes due 2028 (b)
865

 
872

1.90% Euro denominated notes due 2030
117

 
118

3.55% Notes due 2042
662

 
662

Other
10

 
10

International bank borrowings
262

 
309

Obligations under finance leases
137

 
149

 
12,027

 
12,224

Less: current portion of long-term debt
(2,006
)
 
(1,531
)
Total long-term debt
10,021

 
10,693

Total debt
$
16,875

 
$
13,956

 
(a)
Amounts are net of unamortized discounts, premiums and/or debt issuance costs as applicable.
(b)
March 31, 2020 and December 31, 2019 included a cumulative $9 million and $38 million adjustment to carrying value, respectively, related to hedge accounting of interest rate swaps. Refer to Note 5 for additional information.

The company maintains a $5 billion unsecured revolving credit agreement with a syndicate of banking institutions that expires March 26, 2024. There are no financial maintenance covenants contained within the credit agreement. No borrowings were outstanding under the credit agreement as of March 31, 2020.

5. 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

12


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, cross-currency interest rate contracts are generally not designated as hedges for accounting purposes. Certain currency contracts related to forecasted transactions are designated as hedges for accounting purposes. 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 March 31, 2020, 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 March 31, 2020 and December 31, 2019 for consolidated subsidiaries:
 
 
 
 
 
Fair Value
 
Notional Amounts
 
Assets (a)
 
Liabilities (a)
(Millions of dollars)
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
Derivatives Not Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items
$
6,896

 
$
7,936

 
$
64

 
$
62

 
$
109

 
$
37

Forecasted transactions
580

 
748

 
16

 
14

 
32

 
15

Cross-currency interest rate swaps
994

 
1,029

 
102

 
35

 
44

 
40

Commodity contracts
N/A

 
N/A

 

 

 
3

 

Total
$
8,470

 
$
9,713

 
$
182

 
$
111

 
$
188

 
$
92

Derivatives Designated as Hedging Instruments:
 
 
 
 
 
 
 
 
 
 
 
Currency contracts:
 
 
 
 
 
 
 
 
 
 
 
Balance sheet items
$

 
$
27

 
$

 
$
2

 
$

 
$
3

       Forecasted transactions
136

 
464

 
13

 
9

 
24

 
3

Commodity contracts
N/A

 
N/A

 

 
6

 
14

 
1

Interest rate swaps
1,865

 
1,908

 
51

 
39

 

 

Total Hedges
$
2,001

 
$
2,399

 
$
64

 
$
56

 
$
38

 
$
7

Total Derivatives
$
10,471

 
$
12,112

 
$
246

 
$
167

 
$
226

 
$
99

 
(a)
Current assets of $104 million are recorded in prepaid and other current assets; long-term assets of $142 million are recorded in other long-term assets; current liabilities of $167 million are recorded in other current liabilities; and long-term liabilities of $59 million are recorded in other long-term liabilities.




13


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 for the majority of 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 March 31, 2020, Linde has a 1.2 billion ($1.4 billion) intercompany Euro-denominated credit facility loan which is designated as a hedge of the net investment position in its foreign operations. Since hedge inception, exchange rate movements have reduced the credit facility loan by $29 million, with the offsetting gain shown within the cumulative translation component of AOCI in the condensed consolidated balance sheets and the consolidated statements of comprehensive income.

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 of 2019 and prior will remain in AOCI, until appropriate, such as upon sale or 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 2020 through 2028 was $1,865 million at March 31, 2020 and $1,908 million at December 31, 2019 (see Note 6 for further information).


14


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 March 31, 2020 and December 31, 2019 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 March 31,
(Millions of dollars)
2020
 
2019
Derivatives Not Designated as Hedging Instruments
 
 
 
Currency contracts:
 
 
 
Balance sheet items
 
 
 
Debt-related
$
(5
)
 
$
194

Other balance sheet items
(41
)
 
(2
)
Total
$
(46
)
 
$
192



* 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 generally 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 the three months ended March 31, 2020. 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.

6. 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:

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Fair Value Measurements Using
 
Level 1
 
Level 2
 
Level 3
(Millions of dollars)
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
 
March 31,
2020
 
December 31,
2019
Assets
 
 
 
 
 
 
 
 
 
 
 
Derivative assets
$

 
$

 
$
246

 
$
167

 
$

 
$

Investments and securities*
19

 
18

 

 

 
27

 
28

                 Total
$
19

 
$
18

 
$
246

 
$
167

 
$
27

 
$
28

 
 
 
 
 
 
 
 
 
 
 
 
Liabilities
 
 
 
 
 
 
 
 
 
 
 
Derivative liabilities
$

 
$

 
$
226

 
$
99

 
$

 
$



* Investments and securities are recorded in prepaid and other current assets and other long-term 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 three months ended March 31, 2020. Gains (losses) recognized in earnings are recorded to interest expense - net in the company's consolidated statements of income.
(Millions of dollars)
2020
Balance at January 1
$
28

Additions

Gains (losses) recognized in earnings
(1
)
Balance at March 31
$
27



The fair value of cash and cash equivalents, short-term debt, accounts receivable-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 March 31, 2020, the estimated fair value of Linde’s long-term debt portfolio was $12,200 million versus a carrying value of $12,027 million. At December 31, 2019, the estimated fair value of Linde’s long-term debt portfolio was $12,375 million versus a carrying value of $12,224 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.

7. 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:

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Quarter Ended March 31,
 
2020
 
2019
Numerator (Millions of dollars)
 
 
 
Income from continuing operations
$
571

 
$
435

Income from discontinued operations
2

 
82

Net Income – Linde plc
$
573

 
$
517

Denominator (Thousands of shares)
 
 
 
Weighted average shares outstanding
530,952

 
545,362

Shares earned and issuable under compensation plans
263

 
192

Weighted average shares used in basic earnings per share
531,215

 
545,554

Effect of dilutive securities
 
 
 
Stock options and awards
3,741

 
3,593

Weighted average shares used in diluted earnings per share
534,956

 
549,147

Basic earnings per share from continuing operations
$
1.07

 
$
0.80

Basic earnings per share from discontinued operations

 
0.15

Basic Earnings Per Share
$
1.07

 
$
0.95

Diluted earnings per share from continuing operations
$
1.07

 
$
0.79

Diluted earnings per share from discontinued operations

 
0.15

Diluted Earnings Per Share
$
1.07

 
$
0.94


There were no antidilutive shares for any period presented.
8. Retirement Programs
The components of net pension and postretirement benefits other than pensions (“OPEB”) costs for the quarters ended March 31, 2020 and 2019 are shown below:
 
 
Quarter Ended March 31,
 
Pensions
 
OPEB
(Millions of dollars)
2020
 
2019
 
2020
 
2019
Amount recognized in Operating Profit
 
 
 
 
 
 
 
Service cost
$
37

 
$
39

 
$
1

 
$
1

Amount recognized in Net pension and OPEB cost (benefit), excluding service cost
 
 
 
 
 
 
 
Interest cost
52

 
68

 
1

 
2

Expected return on plan assets
(120
)
 
(119
)
 

 

Net amortization and deferral
23

 
14

 
(1
)
 
(1
)
Settlement charge (a)

 
51

 

 

 
(45
)
 
14

 

 
1

 Net periodic benefit cost
$
(8
)
 
$
53

 
$
1

 
$
2



(a) 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 2020 required contributions to its pension plans will be in the range of $50 million to $80 million, of which $17 million have been made through March 31, 2020.
9. 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

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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 2019 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 March 31, 2020 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 $200 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 ($422 million) on White Martins, the Brazil-based subsidiary of Praxair, Inc. The fine was reduced to R$1.7 billion Brazilian reais ($326 million) due to a calculation error made by CADE. The fine against White Martins was overturned by the Ninth Federal Court of Brasilia. CADE appealed this decision, and the Federal Court of Appeals rejected CADE's appeal and confirmed the decision of the Ninth Federal Court of Brasilia. CADE may appeal to the Superior Court of Justice.
Similarly, on September 1, 2010, CADE imposed a civil fine of R$237 million Brazilian reais ($46 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 ($36 million) due to a calculation error made by CADE. The fine against Linde Gases Ltda. was overturned by the Seventh Federal Court in Brasilia. CADE appealed this decision, and the Federal Court of Appeals rejected CADE's appeal and confirmed the decision of the Seventh Federal Court of Brasilia. CADE filed an appeal with the Superior Court of Justice, and a final decision is pending.
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.

10. Segments

For a description of Linde plc's operating segments, refer to Note 20 to the consolidated financial statements on Linde plc's 2019 Annual Report on Form 10-K.

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The table below presents sales and operating profit information about reportable segments and Other for the quarters ended March 31, 2020 and 2019.
  
Quarter Ended March 31,
(Millions of dollars)
2020
 
2019