Linde plc(LIN) - 2023 Q4 - Annual Report

Part I Business Linde plc, the world's largest industrial gas company, provides atmospheric and process gases and engineering services globally - Linde is the largest industrial gas company worldwide, primarily offering atmospheric and process gases[15] Annual Sales | Year | Sales (in millions) | | :--- | :--- | | 2023 | $32,854 | | 2022 | $33,364 | | 2021 | $30,793 | - The company serves diverse industries including healthcare, chemicals, manufacturing, and electronics[16] - Gases are distributed via three primary methods: on-site (pipelines), merchant (bulk liquid), and packaged (cylinders), catering to various customer volumes[21][23][24][25] - Linde is a global company, with approximately 68% of its 2023 sales generated outside the United States[30] - As of December 31, 2023, Linde had 66,323 employees worldwide[43] Risk Factors The company faces material risks from economic conditions, energy cost volatility, international operations, goodwill impairment, and cybersecurity threats - Key risks include economic downturns potentially reducing demand and customer payment ability[57] - Increased energy and raw material costs could reduce profitability, often mitigated by contractual clauses[59] - International operations in over 80 countries expose the company to currency fluctuations and political instability[61][62] - Goodwill impairment risk exists for the $27 billion held as of December 31, 2023, due to economic trends or business disruptions[65] - Operational failures at facilities and disruptions from natural disasters or acts of war pose significant risks[66][72] - Cybersecurity threats to IT systems could lead to business interruption, data loss, and regulatory action[73][74] - Regulatory and tax changes, including the OECD's Pillar Two, could increase the effective tax rate[79][92][93] Unresolved Staff Comments There are no unresolved staff comments - Not applicable[97] Cybersecurity Linde manages cybersecurity as a top enterprise risk with a Zero Trust strategy and Audit Committee oversight, with no significant impact from attacks to date - The company's cybersecurity strategy is based on the Zero Trust principle and includes a Global Security Incident Response procedure[99] - The Audit Committee provides governance oversight, receiving quarterly updates, with the CISO reporting to the CIO[102] - To date, cyber attacks have not significantly impacted Linde's operations or financial results[101] Properties Linde operates a global network of industrial gas production facilities across Americas, EMEA, and APAC, with executive offices in the UK and US - The Americas segment operates approximately 350 production facilities, including five major pipeline complexes in North America[106] - The EMEA segment has approximately 275 cryogenic air separation and carbon dioxide plants, primarily in Germany, the U.K., and France[107] - The APAC segment operates approximately 230 cryogenic air separation and carbon dioxide plants, primarily in China, Australia, India, and South Korea[108] - The Engineering business operates owned factories in Germany, France, the United States, and China[109] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 17 of the Notes to Consolidated Financial Statements - Information is incorporated by reference to Note 17, "Commitments and Contingencies"[110] Mine Safety Disclosures This item is not applicable to the company - Not Applicable[111] Part II Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities Linde plc shares trade on Nasdaq under 'LIN' since November 2023, with active share repurchase programs and strong five-year stock performance - Effective November 7, 2023, Linde delisted from NYSE and began trading on Nasdaq under ticker symbol LIN[114] Issuer Purchases of Equity Securities (Q4 2023) | Period | Total Shares Purchased (Thousands) | Average Price Paid Per Share | Approximate Dollar Value of Shares that May Yet be Purchased (Millions) | | :--- | :--- | :--- | :--- | | October 2023 | 852 | $373.13 | $17,051 | | November 2023 | 657 | $400.45 | $16,788 | | December 2023 | 1,042 | $405.41 | $16,366 | | Fourth Quarter 2023 | 2,551 | $393.35 | $16,366 | - A new $15.0 billion share repurchase program was approved on October 23, 2023, with $16.4 billion remaining under programs as of year-end 2023[116] Five-Year Cumulative Total Returns (2018-2023) | | 2018 | 2019 | 2020 | 2021 | 2022 | 2023 | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | LIN | $100 | $139 | $175 | $234 | $223 | $285 | | S&P 500 (SPX) | $100 | $131 | $156 | $200 | $164 | $207 | | S&P Materials (S5MATR) | $100 | $125 | $150 | $191 | $168 | $189 | Reserved This item is not applicable - Not applicable[119] Management's Discussion and Analysis of Financial Condition and Results of Operations This section provides management's perspective on the company's financial condition and results of operations for 2023, covering consolidated and segment performance, liquidity, and critical accounting estimates Executive Summary – Financial Results & Outlook In 2023, sales decreased 2% to $32.9 billion due to lower pass-through and volumes, offset by 6% higher pricing, while adjusted operating profit grew 15% to $9.1 billion - Sales of $32,854 million were 2% below 2022, impacted by lower cost pass-through, Engineering sales, and volumes, partially offset by 6% higher pricing[132] - Reported operating profit was $8,024 million, up 49%, while adjusted operating profit grew 15% to $9,070 million, driven by pricing and productivity[132] - Adjusted diluted EPS was $14.20, a 16% increase over 2022[132] - Cash flow from operations was $9,305 million, an increase of $441 million from 2022[132] Consolidated Results and Other Information In 2023, consolidated sales decreased 2% to $32.9 billion despite 6% price improvement, while reported operating profit surged 49% to $8.0 billion and adjusted operating profit increased 15% to $9.1 billion Consolidated Results Summary (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Reported Sales | $32,854M | $33,364M | (2)% | | Reported Operating Profit | $8,024M | $5,369M | 49% | | Reported Net Income - Linde plc | $6,199M | $4,147M | 49% | | Reported Diluted EPS | $12.59 | $8.23 | 53% | | Adjusted Operating Profit | $9,070M | $7,904M | 15% | | Adjusted Diluted EPS | $14.20 | $12.29 | 16% | Factors Contributing to Sales Change (2023 vs. 2022) | Factor | % Change | | :--- | :--- | | Volume | (1)% | | Price/Mix | 6% | | Cost pass-through | (3)% | | Currency | (1)% | | Acquisitions/divestitures | (1)% | | Engineering | (2)% | | Total | (2)% | - Reported depreciation and amortization expense decreased by $388 million (9%), primarily due to lower merger-related asset amortization[142] - Other charges were significantly lower at $40 million in 2023 compared to $1,029 million in 2022, due to large Russia-related charges in 2022[144] Segment Discussion This section details 2023 segment performance, with Americas, EMEA, and APAC showing operating profit growth from pricing, while Engineering sales and profit declined due to project timing and Russia Segment Sales and Operating Profit (2023 vs 2022) | Segment | Sales 2023 (M) | Sales 2022 (M) | Sales Var. | Op. Profit 2023 (M) | Op. Profit 2022 (M) | Op. Profit Var. | | :--- | :--- | :--- | :--- | :--- | :--- | :--- | | Americas | $14,304 | $13,874 | 3% | $4,244 | $3,732 | 14% | | EMEA | $8,542 | $8,443 | 1% | $2,486 | $2,013 | 23% | | APAC | $6,559 | $6,480 | 1% | $1,806 | $1,670 | 8% | | Engineering | $2,160 | $2,762 | (22)% | $491 | $555 | (12)% | | Other | $1,289 | $1,805 | (29)% | $43 | $(66) | 165% | Americas The Americas segment sales increased 3% to $14.3 billion due to 6% higher pricing and acquisitions, with operating profit growing 14% to $4.2 billion Americas Segment Performance (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Sales | $14,304M | $13,874M | 3% | | Operating Profit | $4,244M | $3,732M | 14% | | Operating Margin | 29.7% | 26.9% | | - Sales growth was driven by 6% higher pricing and a 3% increase from acquisitions (nexAir), offset by 6% lower cost pass-through[186] EMEA EMEA sales increased 1% to $8.5 billion due to 9% price increase, offset by volume decline and divestitures, with operating profit surging 23% to $2.5 billion EMEA Segment Performance (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Sales | $8,542M | $8,443M | 1% | | Operating Profit | $2,486M | $2,013M | 23% | | Operating Margin | 29.1% | 23.8% | | - Sales were driven by a 9% price increase, largely offset by a 4% volume decrease, 3% lower cost pass-through, and 2% from net divestitures[190] APAC APAC sales rose 1% to $6.6 billion from 2% volume and 4% pricing, offset by 4% currency impact, with operating profit growing 8% to $1.8 billion APAC Segment Performance (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Sales | $6,559M | $6,480M | 1% | | Operating Profit | $1,806M | $1,670M | 8% | | Operating Margin | 27.5% | 25.8% | | - Sales growth was supported by a 2% volume increase and 4% higher pricing, but negatively impacted by a 4% currency headwind[193] Engineering Engineering segment sales decreased 22% to $2.2 billion and operating profit fell 12% to $491 million, primarily due to project timing and Russian project wind-down Engineering Segment Performance (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Sales | $2,160M | $2,762M | (22)% | | Operating Profit | $491M | $555M | (12)% | | Operating Margin | 22.7% | 20.1% | | - Sales decreased due to project timing, with Russian projects contributing $238 million in 2023, down from $894 million in 2022[196] Other Other category sales decreased 29% to $1.3 billion due to the GIST divestiture, while operating profit improved significantly to $43 million from a $66 million loss in 2022 Other Segment Performance (2023 vs 2022) | Metric | 2023 | 2022 | Variance | | :--- | :--- | :--- | :--- | | Sales | $1,289M | $1,805M | (29)% | | Operating Profit | $43M | $(66)M | 165% | | Operating Margin | 3.3% | (3.7)% | | - The sales decrease was primarily due to the sale of the GIST business in Q3 2022, which had a (31)% impact on sales[199] Liquidity, Capital Resources and Other Financial Data In 2023, Linde generated $9.3 billion in cash from operations, with major uses including capital expenditures, share repurchases, and dividends, while net debt increased to $14.7 billion Summary of Cash Flows (in millions) | Activity | 2023 | 2022 | | :--- | :--- | :--- | | Net cash provided by operating activities | $9,305 | $8,864 | | Net cash used for investing activities | $(4,670) | $(3,088) | | Net cash used for financing activities | $(5,400) | $(3,089) | - Primary uses of cash in 2023 were capital expenditures ($3,787 million), net share purchases ($3,925 million), and cash dividends ($2,482 million)[206] - Capital expenditures increased to $3,787 million in 2023 from $3,173 million in 2022, with approximately 63% invested in the Americas segment[210] - Total net debt increased to $14,709 million at year-end 2023 from $12,478 million at year-end 2022[219] - Linde maintains strong credit ratings (A/A2) and has $6.5 billion in undrawn revolving credit facilities[220] Critical Accounting Estimates Management identifies critical accounting estimates including revenue recognition for long-term contracts, pension benefits, asset impairment, and income taxes, all requiring significant judgment - Revenue recognition for long-term construction contracts relies on accurate estimates of total costs at completion using a cost-incurred input method[224][225] - Pension benefit calculations depend on key assumptions including expected long-term asset returns (7.00% for U.S. plans), discount rates, and compensation increases[226][229] - Goodwill impairment testing for $26,751 million at year-end 2023 indicated no impairment[233][234] - Income tax estimates involve evaluating deferred tax assets ($1,292 million net) and assessing uncertain tax positions ($304 million)[239][240] Non-GAAP Financial Measures This section reconciles reported GAAP to adjusted non-GAAP financial measures, primarily excluding purchase accounting impacts and non-recurring charges, with 2023 adjusted operating profit at $9.1 billion and adjusted diluted EPS at $14.20 Reconciliation of Reported to Adjusted Operating Profit (2023) | (Millions of dollars) | Amount | | :--- | :--- | | Reported operating profit | $8,024 | | Add: Other charges | $40 | | Add: Purchase accounting impacts - Linde AG | $1,006 | | Adjusted operating profit | $9,070 | Reconciliation of Reported to Adjusted Diluted EPS (2023) | (per share data) | Amount | | :--- | :--- | | Reported diluted EPS | $12.59 | | Add: Pension settlement charge | $0.03 | | Add: Other charges | $(0.08) | | Add: Purchase accounting impacts - Linde AG | $1.66 | | Adjusted diluted EPS | $14.20 | Reconciliation of Net Income to Adjusted EBITDA (2023) | (Millions of dollars) | Amount | | :--- | :--- | | Net Income - Linde plc | $6,199 | | Add: Noncontrolling interests, Interest, Taxes, D&A, etc. | ... | | EBITDA | $12,007 | | Add: Adjustments (Other charges, Purchase accounting) | $126 | | Adjusted EBITDA | $12,133 | Quantitative and Qualitative Disclosures About Market Risk Linde manages market risks from interest rate and foreign currency fluctuations using derivatives, with 74% of its $19.4 billion debt fixed-rate at year-end 2023, and a 100 basis point rate increase impacting fixed-rate debt fair value by $742 million - The company uses derivative financial instruments, including interest-rate swaps and currency contracts, to minimize interest rate and foreign exchange fluctuations[271] - At December 31, 2023, total debt was $19,373 million, with 74% fixed-rate and 26% floating-rate (including derivatives)[273] - A hypothetical 100 basis point increase in interest rates would decrease the fair value of fixed-rate debt by approximately $742 million[274] - A 100 basis point increase in interest rates would have an after-tax earnings and cash flow impact of approximately $50 million on variable-rate debt[275] Financial Statements and Supplementary Data This section contains Linde plc's complete audited consolidated financial statements for 2023, including statements of income, balance sheets, cash flows, and equity, along with management's and auditor's reports Management's Reports and Auditor's Report Management confirmed effective internal control over financial reporting as of December 31, 2023, and PricewaterhouseCoopers LLP issued an unqualified opinion, identifying 'Revenue Recognition - Estimated Costs at Completion' as a Critical Audit Matter - Management concluded that internal control over financial reporting was effective as of December 31, 2023[283] - PricewaterhouseCoopers LLP issued an unqualified opinion on financial statements and internal control effectiveness[287] - The auditor identified 'Revenue Recognition - Estimated Costs at Completion' for equipment contracts as a Critical Audit Matter due to significant judgment[293][295] Consolidated Financial Statements The consolidated financial statements for 2023 show sales of $32.9 billion, net income of $6.2 billion, total assets of $80.8 billion, total equity of $41.1 billion, and cash flow from operations of $9.3 billion Key Financial Statement Data (2023) | Metric | Amount (in millions) | | :--- | :--- | | Income Statement: | | | Sales | $32,854 | | Operating Profit | $8,024 | | Net Income - Linde plc | $6,199 | | Diluted EPS | $12.59 | | Balance Sheet (Year-End): | | | Total Assets | $80,811 | | Total Liabilities | $39,716 | | Total Equity | $41,082 | | Cash Flow Statement: | | | Net cash from operating activities | $9,305 | Notes to Consolidated Financial Statements The notes provide detailed disclosures on accounting policies, acquisitions (nexAir), other charges (Russia deconsolidation), debt, retirement benefits, and contingencies, including a $1.1 billion Russian project liability Note 2. Acquisitions and Divestitures On January 5, 2023, Linde acquired the remaining 77% of nexAir, LLC for $866 million, resulting in $485 million of goodwill, and in 2022, sold its GIST business for $109 million - Linde acquired the remaining 77% of nexAir, LLC for $866 million in an all-cash transaction on January 5, 2023[348] - The nexAir acquisition resulted in $485 million of goodwill, primarily from assembled workforce and operating synergies, expected to be mostly tax-deductible[354] - In Q3 2022, the company sold its GIST business for net proceeds of $109 million, recording a $21 million loss[355] Note 3. Other Charges In 2023, other charges were $40 million, a sharp decrease from $1 billion in 2022, which included a $787 million loss from Russian subsidiary deconsolidation and a $380 million write-off of related receivables - As of June 30, 2022, Linde deconsolidated its Russian gas and engineering business entities, resulting in a $787 million loss[359] - The deconsolidation included a $407 million loss and a write-off of approximately $380 million in receivables from deconsolidated entities[360][362] Note 11. Debt As of December 31, 2023, Linde had total debt of $19.4 billion, comprising $4.7 billion in short-term debt and $14.7 billion in long-term debt, maintaining significant liquidity through $6.5 billion in undrawn revolving credit facilities Total Debt Summary (December 31, 2023) | Debt Category | Amount (in millions) | | :--- | :--- | | Short-term debt | $4,713 | | Long-term debt (including current portion) | $14,660 | | Total debt | $19,373 | - The company has a $5.0 billion five-year revolving credit facility expiring in 2027 and a $1.5 billion 364-day facility expiring in 2024, both undrawn at year-end 2023[419][420][421] Note 17. Commitments and Contingencies Linde is involved in various legal proceedings, notably a dispute with RusChemAlliance (RCA) over a terminated Russian contract, for which a $1.1 billion contingent liability was recorded at year-end 2023, with no expected adverse earnings impact despite an unfavorable Russian court ruling - A Russian court issued an injunction against Linde's Russian assets at RusChemAlliance's request, related to a terminated engineering contract lawfully suspended due to sanctions[519] - As of December 31, 2023, Linde recorded a contingent liability of $1.1 billion related to RCA advance payments, with no expected adverse earnings impact from an unfavorable Russian court decision[521][523] - Other significant contingencies include tax disputes in Brazil and appraisal proceedings in Germany from former Linde AG shareholders[516] Controls and Procedures Management concluded that Linde's disclosure controls and procedures were effective as of December 31, 2023, with no material changes to internal control over financial reporting during Q4 2023 - Management concluded that disclosure controls and procedures were effective as of December 31, 2023[553] - No material changes occurred to internal control over financial reporting during Q4 2023[555] Part III Directors, Executive Officers and Corporate Governance This section incorporates information from Linde's Proxy Statement, confirming an independent Audit Committee with an 'audit committee financial expert' and a 'Code of Business Integrity' - The Audit Committee members include Prof. Dr. Martin H. Richenhagen (chairman), Dr. Thomas Enders, Dr. Victoria Ossadnik, and Alberto Weisser[560] - The Board has determined that Alberto Weisser qualifies as an 'audit committee financial expert'[561] - Linde has adopted a 'Code of Business Integrity' applicable to all directors and employees[562] Executive Compensation Information regarding executive and director compensation is incorporated by reference from Linde's Proxy Statement - Information is incorporated by reference to the sections captioned "Executive Compensation Matters" and "Corporate Governance and Board Matters - Director Compensation" in Linde's Proxy Statement[563] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters This section provides equity compensation plan information as of December 31, 2023, with approximately 7.0 million securities to be issued and 7.7 million available for future issuance Equity Compensation Plan Information (as of Dec 31, 2023) | Plan Category | Securities to be issued upon exercise (a) | Weighted-average exercise price (b) | Securities remaining available for future issuance (c) | | :--- | :--- | :--- | :--- | | Equity compensation plans approved by shareholders | 7,034,362 | $180.58 | 7,661,431 | Certain Relationships and Related Transactions and Director Independence Information regarding related person transactions and director independence is incorporated by reference from Linde's Proxy Statement - Information is incorporated by reference from Linde's Proxy Statement[568] Principal Accounting Fees and Services Information regarding fees paid to the principal accountant is incorporated by reference from the "Audit Matters" section of Linde's Proxy Statement - Information is incorporated by reference to the section captioned "Audit Matters" in Linde's Proxy Statement[569] Part IV Exhibits, Financial Statement Schedules This section lists documents filed as part of the Form 10-K, noting the omission of financial statement schedules and providing an index of all filed exhibits - All financial statement schedules have been omitted as not applicable or included elsewhere[574] - An index of exhibits filed with the report is included, referencing key corporate and financial agreements[574][575] Form 10-K Summary No summary is provided under this item - None[585]