LINDE PLC (LIN) FY 2022 MD&A

ITEM 7.     MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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

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BUSINESS OVERVIEW

The company's primary products in its industrial gases business are atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). The company also designs, engineers, and builds equipment that produces industrial gases and offers its customers a wide range of gas production and processing services such as olefin plants, natural gas plants, air separation plants, hydrogen and synthesis gas plants and other types of plants.

Linde’s industrial gas operations are managed on a geographical basis and in 2022 86% of sales were generated by Linde's three geographic segments (Americas, EMEA and APAC) and the remaining 14% are related largely to the Engineering segment, and to a lesser extent Other (see Note 18 to the consolidated financial statements for operating segment details).

Linde serves a diverse group of industries including healthcare, chemicals and energy, manufacturing, metals and mining, food and beverage, and electronics. The diversity of end-markets supports financial stability for Linde in varied business cycles.

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

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

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EXECUTIVE SUMMARY – FINANCIAL RESULTS & OUTLOOK

2022 Year in review

•Sales of $33,364 million were 8% above 2021 sales of $30,793 million. Higher pricing across all geographic segments contributed 7% to sales. Cost pass-through increased sales by 6% with minimal impact on operating profit. Volume increased sales by 1%. Currency translation decreased sales by 5%, largely in EMEA and APAC. Divestitures decreased sales by 1%.

•Reported operating profit of $5,369 million was 8% above 2021. Adjusted operating profit of $7,904 million was 10% above 2021. The increase in the reported operating profit was primarily due to higher pricing, productivity initiatives and lower depreciation and amortization driven by merger related assets, which more than offset Russia-Ukraine conflict and other charges and the adverse impacts of inflation and currency in the year. The increase in adjusted operating profit increase was primarily due to higher pricing and productivity initiatives, which more than offset the adverse impacts of inflation and currency in the year.*

•Income from continuing operations of $4,147 million and diluted earnings per share from continuing operations of $8.23 increased from $3,821 million and $7.32, respectively in 2021. Adjusted income from continuing operations of $6,195 million and adjusted diluted earnings per share from continuing operations of $12.29 were 11% and 15%, respectively above 2021 adjusted amounts.*

•Cash flow from operations of $8,864 million was $861 million below 2021. The decrease was driven by higher working capital requirements, including lower inflows from contract liabilities from engineering customer advanced payments, partially offset by higher net income adjusted for non cash charges. Capital expenditures were $3,173 million; dividends paid were $2,344 million; net purchases of ordinary shares of $5,132 million; and debt borrowings, net were $4,475 million.

*A reconciliation of the adjusted amounts can be found in the "Non-GAAP Financial Measures" section in this MD&A.

2023 Outlook

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

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CONSOLIDATED RESULTS AND OTHER INFORMATION

The discussion that follows includes a comparison of our results of operations and liquidity and capital resources for the years ended December 31, 2022 and 2021. For the discussion comparing the years ended December 31, 2021 and 2020, refer to Part II, Item 7, Management’s Discussion and Analysis of Financial Condition and Results of Operations, of our Form 10-K for the year ended December 31, 2021.

The following table provides summary information for 2022 and 2021. The reported amounts are GAAP amounts from the Consolidated Statements of Income. The adjusted amounts are intended to supplement investors' understanding of the company's financial information and are not a substitute for GAAP measures.

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(a)See Note 3 to the consolidated financial statements.

(b)Adjusted amounts and Other Financial Data are non-GAAP performance measures. A reconciliation of reported amounts to adjusted amounts can be found in the "Non-GAAP Financial Measures" section of this MD&A.

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Results of Operations

The following table provides a summary of changes in consolidated sales:

2022 Compared With 2021

Sales

Linde sales increased $2,571 million, or 8%, for the 2022 year versus 2021. Higher pricing across all geographic segments contributed 7% to sales. Cost pass-through, representing the contractual billing of energy cost variances primarily to onsite customers, increased sales by 6%, with minimal impact on operating profit. Volume growth in all end markets, except healthcare, and startups increased sales by 1%. Currency translation decreased sales by 5%, largely in EMEA and APAC, driven by the weakening of the Euro, Chinese yuan, British pound and Australian dollar against the U.S. dollar. The impact of divestitures decreased sales by 1%.

Cost of sales, exclusive of depreciation and amortization

Cost of sales, exclusive of depreciation and amortization, increased $1,907 million, or 11%, for the year primarily due to inflation and higher volumes, partially offset by productivity gains and currency effects. Cost of sales, exclusive of depreciation and amortization, was 58.3% and 57.0% of sales, respectively, in 2022 compared to 2021. The increase as a percentage of sales was due primarily to higher cost pass-through to customers.

Selling, general and administrative expenses

Selling, general and administrative expense ("SG&A") decreased $82 million, from $3,189 in 2021 to $3,107 million in 2022. SG&A was 9.3% of sales in 2022 versus 10.4% in 2021. Currency impacts decreased SG&A by approximately $127 million in 2022. Excluding currency impacts, underlying SG&A increased primarily due to higher costs.

Depreciation and amortization

Reported depreciation and amortization expense decreased $431 million, or 9% versus 2021. The decrease is primarily due to lower depreciation and amortization of assets acquired in the merger and currency impacts.

On an adjusted basis, depreciation and amortization expense decreased $49 million, or 2%, versus 2021. Currency impacts decreased depreciation and amortization by $123 million in 2022. Excluding currency impacts, underlying depreciation and amortization increased including new project start ups.

Russia-Ukraine conflict and other charges

Russia-Ukraine conflict and other charges were $1,029 million and $273 million for 2022 and 2021, respectively. The charge for 2022 relates primarily to the deconsolidation and impairment of Russian subsidiaries resulting from the ongoing war in Ukraine and related sanctions recorded as of June 30, 2022. 2021 charges relate to cost reduction program and other charges, primarily severance (see Note 3 to the condensed consolidated financial statements).

On an adjusted basis, these benefits and costs have been excluded in both periods.

Operating profit

Reported operating profit increased $385 million in 2022, or 8%. On an adjusted basis, operating profit increased $728 million, or 10%, for 2022 versus 2021.

On a reported basis, operating profit increased $385 million, or 8% in 2022. The increase was primarily due to higher pricing, volumes, savings from productivity initiatives, and lower depreciation and amortization driven by merger related

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assets. These increases more than offset the adverse impacts of inflation and currency in the year as well as the Russia-Ukraine conflict and other charges of $1,029 million. Cost reduction programs and other charges was $273 million in 2021.

On an adjusted basis, which excludes the impacts of purchase accounting as well as Russia-Ukraine conflict and other charges, operating profit increased $728 million, or 10%. Operating profit growth was driven by higher pricing, volumes and productivity initiatives, which more than offset the effects of inflation and currency during the period. A discussion of operating profit by segment is included in the segment discussion that follows.

Interest expense - net

Reported interest expense – net in 2022 decreased $14 million, or 18%, versus 2021. On an adjusted basis interest expense decreased $32 million, or 25% in 2022 as compared to 2021.

On both a reported and adjusted basis, the decrease year over year was driven primarily by higher interest income on cash deposits, partially offset by higher borrowing costs on short-term debt.

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

Reported net pension and OPEB cost (benefit), excluding service cost were benefits of $237 million and $192 million in 2022 and 2021, respectively. The increase in benefit primarily relates to lower amortization of deferred losses, partially offset by higher interest cost reflective of the higher discount rate environment year-over-year (see Note 16 to the consolidated financial statements).

Effective tax rate

The reported effective tax rate ("ETR") for 2022 was 25.9% versus 24.7% in 2021. The increase in the rate is primarily related to the net tax expense resulting from the deconsolidation and impairment of the company’s business in Russia in 2022. 2021 included a deferred income tax charge related to the revaluation of net deferred tax liabilities for a tax rate increase in the United Kingdom (see Note 5 to the consolidated financial statements).

On an adjusted basis, the ETR for 2022 was 24.2% versus 24.1% in 2021.

Income from equity investments

Reported income from equity investments for 2022 was $172 million as compared to $119 million in 2021. On an adjusted basis, income from equity investments for 2022 was $247 million versus $231 million in 2021.

On a reported basis, the year-over-year increase in income from equity investments was due to a $35 million impairment charge taken in the third quarter of 2021 related to a joint venture in the APAC segment.

On an adjusted basis, the year-over-year increase in income from equity investments was primarily driven by the overall performance of investments in APAC.

Noncontrolling interests from continuing operations

At December 31, 2022, noncontrolling interests from continuing operations consisted primarily of noncontrolling shareholders’ investments in APAC (primarily in China).

Reported noncontrolling interests from continuing operations decreased $1 million, from $135 million in 2021 to $134 million in 2022.

Adjusted noncontrolling interests from continuing operations increased $6 million in 2022 as compared to 2021.

Income from continuing operations

Reported income from continuing operations increased $326 million, or 9%. On an adjusted basis, which excludes the impacts of purchase accounting and Russia-Ukraine conflict and other charges, income from continuing operations increased $616 million, or 11%, in 2022 versus 2021. On both a reported and adjusted basis, the increase was driven by higher operating profit.

Diluted earnings per share from continuing operations

Reported diluted earnings per share from continuing operations increased $0.91, or 12%, in 2022 as compared to 2021. On an adjusted basis, diluted EPS of $12.29 in 2022 increased 15% versus 2021. The increase on both reported and adjusted basis was primarily due to higher income from continuing operations and lower diluted shares outstanding.

Employees

The number of employees at December 31, 2022 was 65,010, a decrease of 10%, or 7,317 employees from 2021, primarily driven by the sale of GIST business, cost reduction initiatives and the deconsolidation of Russian subsidiaries in the EMEA and Engineering segments.

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Other Financial Data

EBITDA from continuing operations increased to $9,745 million in 2022 from $9,738 million in 2021. Adjusted EBITDA from continuing operations increased to $10,873 million for 2022 as compared to $10,179 million in 2021, primarily due to higher adjusted income from continuing operations plus depreciation and amortization versus the prior period.

See the "Non-GAAP Financial Measures" section for definitions and reconciliations of these non-GAAP measures to reported GAAP amounts.

Other Comprehensive Income (Loss)

Other comprehensive income (loss) for the year ended December 31, 2022 was a loss of $778 million resulted primarily from currency translation adjustments of $1,835 million, partially offset by an increase in the funded status of the company's retirement obligations of $1,070 million driven by a higher discount rate environment. The translation adjustments reflect the impact of translating local currency foreign subsidiary financial statements to U.S. dollars, and are largely driven by the movement of the U.S. dollar against major currencies including the Euro, the Chinese yuan and the British pound. See the "Currency" section of the MD&A for exchange rates used for translation purposes and Note 7 to the consolidated financial statements for a summary of the currency translation adjustment component of accumulated other comprehensive income by segment.

Related Party Transactions

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

Environmental Matters

Linde’s principal operations relate to the production and distribution of atmospheric and other industrial gases, which for the most part are used to help customers reduce their emissions. Worldwide costs relating to environmental protection may continue to grow due to increasingly stringent laws and regulations. In addition, Linde may face physical risks from climate change and extreme weather.

Climate Change

Linde operates in jurisdictions that have, or are developing, laws and/or regulations to reduce or mitigate the adverse effects of greenhouse gas ("GHG") emissions and therefore faces a highly uncertain regulatory environment in this area. For example, the U.S. Environmental Protection Agency ("EPA") has promulgated rules requiring reporting of GHG emissions to which Linde, its suppliers and customers are subject to. EPA has also promulgated regulations to restrict GHG emissions, including final rules regulating GHG emissions from light-duty vehicles and certain large manufacturing facilities, many of which are Linde suppliers or customers. In addition to these developments in the United States, several other countries worldwide have already implemented carbon taxation or trading systems which impact the company and its customers, including regulations in China, Singapore and the European Union. Among other impacts, such regulations are expected to raise the cost of energy, which is a significant cost for Linde. Nevertheless, Linde's long-term customer contracts routinely provide rights to recover increased electricity, natural gas, and other costs that are incurred by the company as a result of climate change regulation.

Linde anticipates continued growth in hydrogen sales due to increased focus on decarbonization projects. Traditionally, hydrogen production plants and a large number of other manufacturing and electricity-generating plants have been identified in California and the European Union as a source of carbon dioxide emissions and these plants are subject to cap-and-trade regulations in those jurisdictions. Linde believes it will be able to mitigate the costs of these regulations through the terms of its product supply contracts. However, legislation that limits GHG emissions may impact growth by increasing capital, compliance, operating and maintenance costs and/or decreasing demand.

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

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Linde continuously seeks opportunities to optimize energy use and GHG emissions through research and development in customer applications and rigorous operational energy efficiency, sourcing low-carbon source energy, and purchasing hydrogen as a chemical byproduct where feasible. Linde tracks GHG emission performance versus targets and reports regularly to business management and annually to Linde's Board of Directors. In 2021, a new Sustainability Committee was created. The Committee is responsible for oversight of the Company's programs, policies and strategies related to environmental matters, including climate change, greenhouse gas reduction goals and decarbonization solutions, such as clean energy and carbon management.

At the same time, external factors may provide Linde with future business opportunities. For example, in 2022, several pieces of legislation were enacted, including the Inflation Reduction Act in the U.S., which provides for investments in decarbonization opportunities including hydrogen projects. Other factors include governmental regulation of GHG and other emissions; uncertain costs of energy and certain natural resources; the development of renewable energy alternatives; and new technologies that help extract natural gas, improve air quality, increase energy efficiency and mitigate the impacts of climate change. Linde continues to develop new applications that can help customers lower emissions by reducing energy consumption and increasing product throughput. Stricter regulation of water quality in emerging economies such as China provide a growing market for a number of gases, e.g., oxygen for wastewater treatment. Increased concern about drought in areas such as California and Australia may create additional markets for carbon dioxide for desalination. Renewable fuel standards in the European Union and U.S. can create a market for second-generation biofuels which use industrial gases such as oxygen, carbon dioxide, and hydrogen.

Costs Relating to the Protection of the Environment

Environmental protection costs in 2022 were not significant. Linde anticipates that future annual environmental protection expenditures will be similar to 2022, subject to any significant changes in existing laws and regulations. Based on historical results and current estimates, management does not believe that environmental expenditures will have a material adverse effect on the consolidated financial position, the consolidated results of operations or cash flows in any given year.

Legal Proceedings

See Note 17 to the consolidated financial statements for information concerning legal proceedings.

Retirement Benefits

Pensions

The net periodic benefit cost (benefit) for the U.S. and non-U.S. pension plans was a benefit of $110 million, $35 million and $25 million in 2022, 2021 and 2020, respectively.

The funded status (pension benefit obligation ("PBO") less the fair value of plan assets) for the U.S. plans was a deficit of $238 million and $271 million at December 31, 2022 and 2021, respectively. The funded status for non-U.S. plans was a surplus of $208 million and deficit of $1,430 million at December 31, 2022 and 2021, respectively. Both the U.S. and non-U.S. plans derived the benefit from a lower PBO due to an increase in discount rates.

Global pension contributions were $51 million in 2022, $42 million in 2021, and $91 million in 2020. At a minimum, Linde contributes to its pension plans to comply with local regulatory requirements (e.g., ERISA in the U.S.). Discretionary contributions in excess of the local minimum requirements are made based on many factors, including long-term projections of the plans' funded status, the economic environment, potential risk of overfunding, pension insurance costs and alternative uses of cash. Changes to these factors can impact the timing of discretionary contributions from year to year. Estimated required contributions for 2023 are currently expected to be in the range of $40 million to $50 million.

Linde assumes expected returns on plan assets for 2023 of 7.00% and 5.60% for the U.S. and non-U.S. plans, respectively, which are consistent with the long-term expected returns on its investment portfolios.

Excluding the impact of any settlements, 2023 consolidated pension expense is expected to be a benefit of approximately $118 million. The benefit derived from the expected return on assets assumption for Linde's most significant plans is anticipated to more than offset the expense from service and interest cost accruals and the higher amortization of deferred losses.

Refer to the Critical Accounting Estimates section and Note 16 to the consolidated financial statements for a more detailed discussion of the company’s retirement benefits, including a description of the various retirement plans and the assumptions used in the calculation of net periodic benefit cost (benefit) and funded status.

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Insurance

Linde purchases insurance to limit a variety of property and casualty risks, including those related to property, business interruption, third-party liability and workers’ compensation. Currently, the company self retains up to $10 million per occurrence for vehicle liability in the United States, $5 million per occurrence for workers' compensation and general liability. In addition, the company self retains risk up to €5 million at its various properties worldwide for property damage resulting from fire, flood and other perils affecting its properties along with a separate €5 million deductible on all business interruption resulting from a major peril loss. To mitigate its aggregate loss potential above these retentions, the company purchases catastrophic insurance coverage from highly rated insurance companies. The company does not currently operate or participate in any captive insurance companies or other non-traditional risk transfer alternatives.

At December 31, 2022 and 2021, the company had recorded a total of $71 million and $75 million, respectively, representing an estimate of the retained liability for the ultimate cost of claims incurred and unpaid as of the balance sheet dates. The estimated liability is established using statistical analysis and is based upon historical experience, actuarial assumptions and professional judgment. These estimates are subject to the effects of trends in loss severity and frequency and are subject to a significant degree of inherent variability. If actual claims differ from the company’s estimates, they will be adjusted at that time and financial results could be impacted.

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

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SEGMENT DISCUSSION

Linde’s operations consist of two major product lines: industrial gases and engineering. As further described in the following paragraph, Linde’s industrial gases operations are managed on a geographic basis, which represents three of the company's reportable segments - Americas, EMEA (Europe/Middle East/Africa), and APAC (Asia/South Pacific); a fourth reportable segment, which represents the company's Engineering business, designs and manufactures equipment for air separation and other industrial gas applications specifically for end customers and is managed on a worldwide basis operating in all geographic segments. Other consists of corporate costs and a few smaller businesses which individually do not meet the quantitative thresholds for separate presentation.

The industrial gases product line centers on the manufacturing and distribution of atmospheric gases (oxygen, nitrogen, argon, rare gases) and process gases (carbon dioxide, helium, hydrogen, electronic gases, specialty gases, acetylene). Many of these products are co-products of the same manufacturing process. Linde manufactures and distributes nearly all of its products and manages its customer relationships on a regional basis. Linde’s industrial gases are distributed to various end-markets within a regional segment through one of three basic distribution methods: on-site or tonnage; merchant or bulk; and packaged or cylinder gases. The distribution methods are generally integrated in order to best meet the customer’s needs and very few of its products can be economically transported outside of a region. Therefore, the distribution economics are specific to the various geographies in which the company operates and are consistent with how management assesses performance.

The company’s measure of profit/loss for segment reporting purposes is segment operating profit. Segment operating profit is defined as operating profit excluding purchase accounting impacts of the Linde AG merger, intercompany royalties, and items not indicative of ongoing business trends. This is the manner in which the company’s Chief Operating Decision Maker ("CODM") assesses performance and allocates resources.

The table below presents sales and operating profit information about reportable segments and Other for the years ended December 31, 2022 and 2021.

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Americas

The Americas segment includes Linde’s industrial gases operations in approximately 20 countries including the United States, Canada, Mexico and Brazil.

Sales

Sales for the Americas segment increased $1,771 million, or 15%, in 2022 versus 2021. Higher pricing contributed 6% to sales. Higher volumes increased sales by 4%, driven by higher demand across all end markets except healthcare, led by chemicals and energy. Cost past-through increased sales by 5% with minimal impact on operating profit.

Operating Profit

Operating profit in the Americas segment increased $364 million, or 11%, in 2022 versus 2021 driven primarily by higher pricing, volumes and continued productivity initiatives which more than offset inflation.

EMEA

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The EMEA segment includes Linde's industrial gases operations in approximately 45 European, Middle Eastern and African countries including Germany, the U.K., France, Sweden and the Republic of South Africa.

Sales

EMEA segment sales increased $800 million, or 10%, in 2022 versus 2021. Higher price attainment increased sales by 13%. Cost pass-through, representing the contractual billing of energy cost variances primarily to onsite customers, increased sales by 13% with minimal impact on operating profit. Currency translation decreased sales by 11% due largely to the weakening of the Euro and British pound against the U.S. Dollar. Volume decreased sales by 3%. The impact of net divestitures decreased sales by 2% primarily due to the deconsolidation of Russian subsidiaries as of June 30, 2022.

Operating Profit

Operating Profit for the EMEA segment increased $124 million, or 7%, in 2022 versus 2021. The increase was driven largely by higher pricing and continued productivity initiatives which more than offset currency, inflation and divestitures.

APAC

The APAC segment includes Linde's industrial gases operations in approximately 20 Asian and South Pacific countries and regions including China, Australia, India and South Korea.

Sales

Sales for the APAC segment increased $347 million, or 6%, in 2022 versus 2021. Volume increased 5% including project start-ups in the electronics and chemicals and energy end markets. Higher price increased sales by 5%. Cost pass-through increased sales by 2% with minimal impact on operating profit. Currency translation decreased sales by 6% driven primarily by the weakening of the Australian dollar, Korean won and Chinese Yuan against the U.S. Dollar.

Operating Profit

Operating profit in the APAC segment increased $168 million, or 11%, in 2022 versus 2021. The increase was primarily driven by higher volumes and pricing and continued productivity initiatives which more than offset the impact of currency and inflation.

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Engineering

Sales

Engineering segment sales decreased $105 million, or 4%, in 2022 versus 2021 . The decrease was driven by project timing and negative currency translation, partially offset by a $321 million project progress recognition during the third quarter.

Projects for Russia that were sanctioned and have been wound down represented approximately $894 million of the Engineering segment sales during 2022.

Operating profit

Engineering segment operating profit increased $82 million, or 17%, in 2022 versus 2021 driven by the aforementioned third quarter project and a fourth quarter project settlement, partially offset by other project timing and currency impacts.

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Other

Other consists of corporate costs and a few smaller businesses including: Surface Technologies, GIST and global helium wholesale; which individually do not meet the quantitative thresholds for separate presentation.

Sales

Sales for Other decreased $242 million, or 12%, in 2022 versus 2021. Divestitures decreased sales by 12% due primarily to the sale of the GIST business as of September 30, 2022. Currency translation decreased sales by 4%. Underlying sales increased 3% in the year driven primarily by price and higher volumes of aviation and electronic sales in the coatings business. Cost pass-through increased sales by 1% in 2022.

Sales of the GIST business which was divested as of September 30, 2022 represented approximately $630 million of Other sales during the nine months ended September 30, 2022.

Operating profit

Operating profit in Other decreased $10 million, or 18%, in 2022 versus 2021 due primarily to higher sourcing costs in the global helium business and the impact of divestitures, partially offset by lower corporate costs .

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Currency

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

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

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LIQUIDITY, CAPITAL RESOURCES AND OTHER FINANCIAL DATA

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(a)See Note 3 to the consolidated financial statements.

Cash increased $2,613 million in 2022 versus 2021. The primary sources of cash in 2022 were cash flows from operations of $8,864 million and debt borrowings, net of $4,475 million. The primary uses of cash included capital expenditures of $3,173 million, net purchases of ordinary shares of $5,132 million, cash dividends to shareholders of $2,344 million.

2022 compared with 2021

Cash Flows From Operations

Cash flows from operations was $8,864 million, a decrease of $861 million from 2021. The decrease was driven primarily by higher working capital requirements, including lower inflows from contract liabilities from engineering customer advanced payments, partially offset by higher net income adjusted for non cash charges. Russia-Ukraine conflict and other charges, net of payments, were $902 million and $98 million for the years ended December 31, 2022 and 2021, respectively, representing charges of $1,029 million and $273 million net of related cash outflows of $127 million and $175 million, respectively, in each period.

As of December 31, 2022, Linde has approximately $1.7 billion recorded in contract liabilities within the consolidated balance sheet related to engineering projects in Russia. Any obligation to satisfy the related residual contract liabilities may have an adverse effect on Linde’s cash flows.

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Investing

Net cash used for investing activities was $3,088 million in 2022 compared to $3,007 million in 2021. The increase was primarily driven by higher capital expenditures and acquisitions, partially offset by proceeds from divestitures, net of cash divested and asset sales.

Capital expenditures in 2022 were $3,173 million, an increase of $87 million from 2021. Capital expenditures during 2022 related primarily to investments in new plant and production equipment for operating and growth requirements. Approximately 52% of the capital expenditures were in the Americas segment with 27% in the APAC segment and the rest primarily in the EMEA segment.

At December 31, 2022 , Linde's sale of gas backlog of large projects under construction was approximately $5.7 billion. This represents the total estimated capital cost of large plants under construction.

Acquisitions, net of cash acquired for 2022 were $110 million, an increase of $22 million from 2021. Acquisitions, net of cash acquired for the year ended December 31, 2021 were $88 million. Acquisitions in each period related primarily to the Americas and EMEA. On January 6, 2023, Linde purchased the remaining 77.2% ownership interest in nexAir, LLC in an all cash transaction with a total purchase price of approximately $0.8 billion (see Note 20 to the consolidated financial statements).

Divestitures and asset sales, net of cash divested in 2022 were $195 million as compared to $167 million in 2021. Divestiture proceeds for the year include cash received from the sale of the company's GIST business of $184 million, net of cash divested of $75 million, for net proceeds of $109 million (See Note 2 to the consolidated financial statements).

Financing

Linde’s financing strategy is to secure long-term committed funding by issuing public notes and debentures and commercial paper backed by a long-term bank credit agreement. Linde’s international operations are funded through a combination of local borrowing and intercompany funding to minimize the total cost of funds and to manage and centralize currency exchange exposures. As deemed necessary, Linde manages its exposure to interest-rate changes through the use of financial derivatives (see Note 12 to the consolidated financial statements and Item 7A. Quantitative and Qualitative Disclosures About Market Risk).

Cash used for financing activities was $3,089 million in 2022 compared to $7,588 million in 2021. Cash provided by debt was $4,475 million in 2022 versus cash used for debt of $514 million in 2021 primarily driven by higher commercial paper borrowings and debt issuances in 2022. Net purchases of ordinary shares were $5,132 million in 2022 versus $4,562 million in 2021. Cash dividends increased to $2,344 million in 2022 versus $2,189 million in 2021 driven primarily by a 10% increase in dividends per share to $4.68 per share from $4.24 per share, partially offset by lower shares outstanding. Cash used for Noncontrolling interest transactions and other was $88 million for the year ended December 31, 2022 versus cash used of $323 million for the respective 2021 period primarily due to the settlement of the buyout of minority interests in the Republic of South Africa in 2021.

The company believes that it has sufficient operating flexibility, cash reserves, and funding sources to maintain adequate amounts of liquidity to meet its business needs around the world. At December 31, 2022, Linde's credit ratings as reported by Standard & Poor’s and Moody’s were A-1 and P-1 for short-term debt, respectively, and A and A2 for long-term debt, respectively.

Note 11 to the consolidated financial statements includes information with respect to the company’s debt activity in 2022, current debt position, debt covenants and the available credit facilities; and Note 12 includes information relating to derivative financial instruments. Linde's credit facilities are with major financial institutions and are non-cancelable until maturity. Therefore, the company believes the risk of the financial institutions being unable to make required loans under the credit facilities, if requested, to be low. Linde’s major bank credit and long-term debt agreements contain standard covenants. The company was in compliance with these covenants at December 31, 2022 and expects to remain in compliance for the foreseeable future.

The company maintains a $5 billion and a $1.5 billion unsecured and undrawn revolving credit agreements with no associated financial covenants. No borrowings were outstanding under the credit agreements as of December 31, 2022. The company does not anticipate any limitations on its ability to access the debt capital markets and/or other external funding sources and remains committed to its strong ratings from Moody’s and Standard & Poor’s.

Linde’s total net debt outstanding at December 31, 2022 was $12,478 million, $1,094 million higher than $11,384 million at December 31, 2021. The December 31, 2022 net debt balance includes $17,561 million in public securities, and $353 million representing primarily worldwide bank borrowings, net of $5,436 million of cash. Linde’s global effective borrowing rate was approximately 1.7% for 2022.

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In January 2022, Linde repaid €1.0 billion of 0.250% notes that became due. In March 2022, Linde issued €500 million of 1.000% notes due 2027, €750 million of 1.375% notes due 2031, and €800 million of 1.625% notes due 2035. In May 2022, Linde repaid $500 million of 2.20% notes due in August 2022. In November 2022, Linde issued $300 million of 4.80% notes due in 2024 and $600 million of 4.70% notes due in 2025.

On February 28, 2022, the company’s Board of Directors approved the additional repurchase of $10.0 billion of its ordinary shares. For additional information related to the share repurchase programs, see Part II Item 5. Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.

OFF-BALANCE SHEET ARRANGEMENTS

As discussed in Note 17 to the consolidated financial statements, at December 31, 2022, Linde had undrawn outstanding letters of credit, bank guarantees and surety bonds entered into in connection with normal business operations and they are not reasonably likely to have a material impact on Linde’s consolidated financial condition, results of operations, or liquidity.

CRITICAL ACCOUNTING ESTIMATES

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

Revenue Recognition

Long-Term Construction Contracts

The company designs and manufactures equipment for air separation and other varied gas production and processing plants manufactured specifically for end customers. Revenues for sale of equipment contracts are 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. The result is applied to total expected revenue and results in financial statement recognition of revenue in addition to costs incurred to date. Any expected loss on a contract is recognized as an expense immediately. Contract modifications are typically accounted for as part of the existing contract and are recognized as a cumulative adjustment for the inception-to-date effect of such change. We assess performance as progress towards completion is achieved on specific projects, earnings will be impacted by changes to our forecast of revenues and costs on these projects.

The cost incurred input method places considerable importance on accurate estimates of the extent of progress towards completion and may involve estimates on the scope of deliveries and services required to fulfill the contractually defined obligations. The key source of estimation uncertainty is the total estimated costs at completion including material, labor and overhead costs and the resultant state of completion of the contracts. There are inherent uncertainties associated with the estimation process, including technical complexity, duration of construction cycle, potential cost inflation (whether equipment or manpower), and scope considerations all of which may affect the total estimation process. Changes in these estimates may lead to a significant impact on future financial statements.

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Pension Benefits

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

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

The weighted-average expected long-term rates of return on pension plan assets were 7.00% for U.S. plans and 5.60% for non-U.S. plans for the year ended December 31, 2022 (7.00% and 5.28%, respectively at December 31, 2021). The expected long-term rate of return on the U.S. and Non-U.S. plan assets is estimated based on the plans' investment strategy and asset allocation, historical capital market performance and, to a lesser extent, historical plan performance. A 0.50% change in these expected long-term rates of return, with all other variables held constant, would change Linde’s pension expense by approximately $44 million.

The company has consistently used a market-related value of assets rather than the fair value at the measurement date to determine annual pension expense. The market-related value recognizes investment gains or losses over a five-year period. As a result, changes in the fair value of assets from year to year are not immediately reflected in the company’s annual pension expense. Instead, annual pension expense in future periods will be impacted as deferred investment gains or losses are recognized in the market-related value of assets over the five-year period. The consolidated market-related value of assets was $8,898 million, or $1,213 million higher than the fair value of assets of $7,685 million at December 31, 2022. These net deferred investment gains of $1,213 million will be recognized in the calculation of the market-related value of assets ratably over the next four years and will impact future pension expense. Future actual investment gains or losses will impact the market-related value of assets and, therefore, will impact future annual pension expense in a similar manner.

Discount rates are used to calculate the present value of plan liabilities and pension costs and are determined annually by management. The company measures the service and interest cost components of pension and OPEB expense for significant U.S. and non-U.S. plans using the spot rate approach. U.S. plans that do not use the spot rate approach continue to determine discount rates by using a cash flow matching model provided by the company's independent actuaries. The model includes a portfolio of corporate bonds graded Aa or better by at least half of the ratings agencies and matches the U.S. plans' projected cash flows to the calculated spot rates. Discount rates for the remaining Non-U.S. plans are based on market yields for high-quality fixed income investments representing the approximate duration of the pension liabilities on the measurement date. Refer to Note 16 to the consolidated financial statements for a summary of the discount rates used to calculate plan liabilities and benefit costs, and to the Retirement Benefits section of the Consolidated Results and Other Information section of this MD&A for a further discussion of 2022 benefit costs. A 0.50% reduction in discount rates, with all other variables held constant, would increase Linde’s pension expense by approximately $22 million whereas a 0.50% increase in discount rates would result in a decrease of $96 million. A 0.50% reduction in discount rates would increase the PBO by approximately $462 million whereas a 0.50% increase in discount rates would have a favorable impact to the PBO of approximately $417 million.

The weighted-average expected rate of compensation increase was 3.25% for U.S. plans and 2.59% for non-U.S. plans at December 31, 2022 (3.25% and 2.55%, respectively, at December 31, 2021). The estimated annual compensation increase is determined by management every year and is based on historical trends and market indices. A 0.50% change in the expected rate of compensation increase, with all other variables held constant, would change Linde’s pension expense by approximately $6 million and would impact the PBO by approximately $28 million.

Asset Impairments

Goodwill and Other Indefinite-Lived Intangibles Assets

At December 31, 2022, the company had goodwill of $25,817 million and $1,706 million of other indefinite-lived intangible assets. Goodwill represents the aggregate of the excess consideration paid for acquired businesses over the fair value of the net assets acquired. Indefinite-lived other intangibles relate to the Linde name.

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The company performs a goodwill impairment test annually as of October 1 or more frequently if events or circumstances indicate that an impairment loss may have been incurred. The impairment test performed during the fourth quarter of 2022 indicated no impairment. At December 31, 2022, Linde’s enterprise value was approximately $173 billion (outstanding shares multiplied by the year-end stock price plus net debt, and without any control premium) while its total capital was approximately $54 billion.

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

Management believes that the quantitative and qualitative factors used to perform its annual goodwill impairment assessment are appropriate and reasonable. Although the 2022 assessment indicated that it is more likely than not that the fair value of each reporting unit exceeded its carrying value, changes in circumstances or conditions affecting this analysis could have a significant impact on the fair value determination, which could then result in a material impairment charge to the company's results of operations. Reporting units with greater concentration of Linde AG assets fair valued during the 2018 Praxair, Inc. and Linde AG merger are at greater risk of impairment in future periods.

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

See Notes 9 and 10 to the consolidated financial statements.

Long-Lived Assets

Long-lived assets, including property, plant and equipment and finite-lived other intangible assets, are tested for impairment whenever events or changes in circumstances indicate that the carrying amount of an individual asset or asset group may not be recoverable. For purposes of this test, asset groups are determined based upon the lowest level for which there are independent and identifiable cash flows. Based upon Linde's business model an asset group may be a single plant and related assets used to support on-site, merchant and packaged gas customers. Alternatively, the asset group may be a collection of distribution related assets (cylinders, distribution centers, and stores) or be a pipeline complex which includes multiple interdependent plants and related assets connected by pipelines within a geographic area used to support the same distribution methods. As a result of the Russia-Ukraine conflict, Linde deconsolidated its Russian gas and engineering business entities as of June 30, 2022. See Note 3 to the consolidated financial statements.

Income Taxes

At December 31, 2022, Linde had deferred tax assets of $1,247 million (net of valuation allowances of $276 million), and deferred tax liabilities of $6,903 million. At December 31, 2022, uncertain tax positions totaled $325 million (see Note 1 and Note 5 to the consolidated financial statements). Income tax expense was $1,434 million for the year ended December 31, 2022, or about 25.9% of pre-tax income (see Note 5 to the consolidated financial statements for additional information related to taxes).

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

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Contingencies

The company accrues liabilities for non-income tax contingencies when management believes that a loss is probable and the amounts can be reasonably estimated, while contingent gains are recognized only when realized or realizable. If new information becomes available or losses are sustained in excess of recorded amounts, adjustments are charged against income at that time. Management does not anticipate that in the aggregate such losses would have a material adverse effect on the company’s consolidated financial position or liquidity; however, it is possible that the final outcomes could have a material impact on the company’s reported results of operations.

Linde is subject to various claims, legal proceedings and government investigations that arise from time to time in the ordinary course of business. These actions are based upon alleged environmental, tax, antitrust and personal injury claims, among others (see Note 17 to the consolidated financial statements). Such contingencies are significant and the accounting requires considerable management judgments in analyzing each matter to assess the likely outcome and the need for establishing appropriate liabilities and providing adequate disclosures. Linde believes it records and/or discloses such contingencies as appropriate and has reasonably estimated its liabilities.

NEW ACCOUNTING STANDARDS

See Note 1 to the consolidated financial statements for information concerning new accounting standards and the impact of the implementation of these standards on the company’s financial statements.

FAIR VALUE MEASUREMENTS

Linde does not expect changes in the aggregate fair value of its financial assets and liabilities to have a material impact on the consolidated financial statements. See Note 13 to the consolidated financial statements.

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NON-GAAP FINANCIAL MEASURES

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

The non-GAAP measures in the following reconciliations are presented in this MD&A.

Adjusted Amounts

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Net Debt and Adjusted Net Debt

Net debt is a financial liquidity measure used by investors, financial analysts and management to evaluate the ability of a company to repay its debt. Purchase accounting impacts have been excluded as they are non-cash and do not have an impact on liquidity.

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SUPPLEMENTAL GUARANTEE INFORMATION

On June 6, 2020, the company filed a Form S-3 Registration Statement with the SEC (the "Registration Statement").

Linde plc may offer debt securities, preferred shares, depositary shares and ordinary shares under the Registration Statement, and debt securities exchangeable for or convertible into preferred shares, ordinary shares or other debt securities. Debt securities of Linde plc may be guaranteed by Linde Inc. (previously Praxair, Inc.) and/or Linde GmbH (previously Linde AG). Linde plc may provide guarantees of debt securities offered by its wholly owned subsidiaries Linde Inc. or Linde Finance under the Registration Statement.

Linde Inc. is a wholly owned subsidiary of Linde plc. Linde Inc. may offer debt securities under the Registration Statement. Debt securities of Linde Inc. will be guaranteed by Linde plc, and such guarantees by Linde plc may be guaranteed by Linde GmbH. Linde Inc. may also provide (i) guarantees of debt securities offered by Linde plc under the Registration Statement and (ii) guarantees of the guarantees provided by Linde plc of debt securities of Linde Finance offered under the Registration Statement.

Linde Finance B.V. is a wholly owned subsidiary of Linde plc. Linde Finance may offer debt securities under the Registration Statement. Linde plc will guarantee debt securities of Linde Finance offered under the Registration Statement. Linde GmbH and Linde Inc. may guarantee Linde plc’s obligations under its downstream guarantee.

Linde GmbH is a wholly owned subsidiary of Linde plc. Linde GmbH may provide (i) guarantees of debt securities offered by Linde plc under the Registration Statement and (ii) upstream guarantees of downstream guarantees provided by Linde plc of debt securities of Linde Inc. or Linde Finance offered under the Registration Statement.

In September 2019, Linde plc provided downstream guarantees of all of the pre-business combination Linde Inc. and Linde Finance notes, and Linde GmbH and Linde Inc., respectively, provided upstream guarantees of Linde plc’s downstream guarantees.

For further information about the guarantees of the debt securities registered under the Registration Statement (including the ranking of such guarantees, limitations on enforceability of such guarantees and the circumstances under which such guarantees may be released), see “Description of Debt Securities – Guarantees” and “Description of Debt Securities – Ranking” in the Registration Statement, which subsections are incorporated herein by reference.

The following tables present summarized financial information for Linde plc, Linde Inc., Linde GmbH and Linde Finance on a combined basis, after eliminating intercompany transactions and balances between them and excluding investments in and equity in earnings from non-guarantor subsidiaries.

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