Risk areas

Risks which Linde considers significant and which might have a relevant adverse impact on The Linde Group and on its net assets, financial position and results of operations, were they to occur, are described below.

These comprise, firstly, individual Group & corporate risks or business risks, which, irrespective of the probability of their occurrence, have been allocated the highest of the four ratings in the rating scale in terms of their potential impact. Secondly, they comprise clusters of individual business risks with the same cause which are not significant to The Linde Group in terms of their individual rating for the potential impact of the risk, but might have a significant adverse impact if viewed as a risk cluster and aggregated.

To provide a better overview, the risks are summarised below by risk area. Each risk area highlights the main direct cause of the risk. A description is given not only of the potential impact of the risk but also of the principal strategies currently being employed to manage the risk (from a net perspective). Unless otherwise stated, the risks relate to all segments, although the extent to which they do so may vary.

The order in which the risk areas are shown is based on the Group’s current estimate of the relative overall importance of the risk area compared with the other risk areas, starting with the risk area with the greatest relative importance. This does not apply to the description of the risks within a risk area. The estimate of the relative importance of a risk area is based on a comprehensive assessment of the total number of all the individual risks included in the risk area and the ratings of those risks for their potential impact.

Economic risks

Under economic risks, Linde includes risks arising from uncertainty in the global economy as well as customer and sales risks which relate to specific customer or product segments or sales markets.

Risks associated with the global economy

As a company with global operations, Linde is dependent on cyclical trends in the global economy. A number of risk factors are currently responsible for the uncertainty regarding the future development of the global economy. The main structural challenge facing the global economy remains the high level of sovereign debt in key European economies, as well as in the US and major emerging markets. Uncertainty regarding the nature, scope and time of structural reforms to reduce sovereign debt and generate steady growth could put a damper on the investment climate and pose a risk to the forecast growth outlook in the medium term. The positive special effects on global economic growth that are currently expected to materialise in the short term, mainly due to the general low interest rate level, the low oil price and the expansive fiscal policies, could fuel further uncertainty regarding structural reforms. The uncertain future contractual relationship between the United Kingdom and the European Union, as well as the related economic consequences, could also have a negative impact on the investment climate and the growth prospects for Europe.

This year will also be characterised by numerous economic challenges. The uncertainty regarding the stability of the positive growth outlook for the US and the future monetary policy pursued by the US Federal Reserve, as well as its impact on the currencies and economies of the emerging markets, are risk factors for the global economy. Following the key rate hike implemented by the Federal Reserve in December of last year, it is not yet clear whether or not, and to what extent, central banks in other countries will also raise their interest rates this year in order to prevent large-scale capital outflows. Interest rate policy measures could put the economies of these countries under pressure and result in increased volatility on the financial markets, with a potential negative impact on the global economy.

The risk of a more pronounced growth slowdown than expected on the Asian and other high-growth markets, as well as the possibility of a continued weak economic environment in the South Pacific region, could have a negative impact on the global economy.

Further economic risks could arise from the uncertain political development of the world’s geopolitical crisis spots. In particular, the global increase in the risk of terrorism could prompt short-term economic slumps.

These economic risks and the further development of oil prices are interrelated. On the one hand, a low oil price could help to stimulate the economy, particularly in Europe’s export-oriented countries. On the other, sustained low oil prices, or a further drop in oil prices, could further exacerbate the general reluctance to invest in the energy sector, particularly in those countries that are heavily reliant on oil. This would, in turn, have a negative impact on the providers from the industrialised nations. A prolonged phase of low oil prices would increase the risk of mounting insolvency rates among fracking companies in the US or state bankruptcies, both of which would have a negative impact on the financial markets and the global economy.

Should the global economy weaken significantly, there would be the threat of lost sales, a potential lack of new business and an increase in the risk of bad debts in the operating business due to the increasing inability of customers to make payments.

In its function as the parent company of The Linde Group, Linde AG holds investments in Group companies. The carrying amounts of these investments run the risk of a diminution in value should the economic situation or exchange rates of these Group companies change for the worse. This scenario might have an adverse impact on the net income for the year of Linde AG.

Linde operates in many countries and regions, supplying almost all industry sectors. Because of the high level of diversification of its end customers, both in terms of sector and geographical situation, Linde is not exposed to the volatility of a single end customer market. The impact of individual risks on the Group is reduced as a result of Linde’s dual focus on its gases business (which comprises a wide variety of application areas) and plant construction (with its diversified product lines). These two sectors may be affected differently in terms of revenue and earnings when there are changes in certain economic conditions.

Risks associated with competition

Global competition means that the Group is exposed to the risk of losing market share in all product areas, which may in turn result in a fall in revenue and profit. Increased competition is to be seen in markets with good growth potential, despite high barriers to market entry. Weaker growth prospects coupled with the risk of excess capacity and the migration of existing industries are increasing the economic pressure on the more mature markets.

Linde’s overriding strategy is to counter the risks associated with competition by constantly conducting analyses of the market environment, its situation in relation to the competition and the legal framework in each business segment and region. The Group obtains vital information about customer requirements by maintaining regular contact with customers, reinforcing its proximity to the market. Linde uses the information it receives to develop and supply products and services tailored to suit the needs of the market and to enhance its competitive position and continue to raise its market profile.

In the case of industrial gases, for example, Linde is able to stand out from the competition as a result of its technical expertise with gases applications and its profile as an integrated provider of gases and engineering services which can offer various construction and operating models.

Moreover, Linde is continuing with the rigorous implementation of its schemes to reduce costs and improve the efficiency of its processes, with the aim of enhancing its competitiveness.

In plant construction, experts from Linde’s Engineering and Gases Divisions have been working on enhancing the competitiveness of the plant portfolio by adopting even greater standardisation and modularisation.

In the cylinder gas business, a modular, scalable plant programme for filling plants was developed. This should make it possible in future to use a modular approach to adapt filling plants to suit a variety of market conditions, so that they do not require much space, yet achieve increased productivity and provide optimal occupational safety. One key component of this new plant concept is the automation of the various filling plant modules which is currently being realised in a number of global projects in order to ultimately build a fully automated filling plant.

Sales risks in the Healthcare product area

In the Healthcare product area, cost pressure in the healthcare sector and the current trend towards outsourcing by government agencies and health insurance funds means there is a greater risk that the planned growth and profitability targets cannot be met. These factors are especially evident in sales markets in the United States and in Europe.

Linde’s mitigation strategy in the Healthcare product area involves focusing on the development of innovative products and services which take account of the increasing downward pressure on costs in the healthcare sector. These include, for example, new forms of treatment which reduce the length of time patients spend in hospital, and the use of new technologies which make it possible to treat homecare patients more efficiently. These innovations are also promoted by conducting specific healthcare customer surveys on a regular basis. Linde has also used targeted acquisitions to improve its cost structure.

Customer and sales risks associated with the commercialisation of new customer projects and existing projects

Customer and sales risks associated with both the commercialisation of new customer projects or follow-up projects and existing projects cannot be eliminated, especially in the growth markets. There might be technical or economic reasons on the customer side or in the sales markets which could require changes being made to the project or contract, as a result of which it may not be possible to produce the quantities originally assumed in the business plan in full or it may only be possible to produce such quantities behind schedule. This might give rise not only to uneconomic production processes, but also to significant adverse variances from budgeted cash flow, thereby jeopardising the revenue and earnings targets attached to the investment. To ensure that critical shortfalls are identified and remedied at an early stage, Linde has introduced project prioritisation and additional project management measures. Moreover, the Group has taken steps to ensure that all relevant parties are involved in the risk assessment before the project commences. Close customer relationships and market observation, also during the project term, help ensure that any problems can be solved in partnership with the customer early on.

Sales risks associated with sustained low oil prices

Oil prices started falling continually from the summer of 2014, a trend that took the markets completely by surprise. Particularly for the Engineering Division, the uncertainty regarding the further development in the oil price poses a risk to the achievement of short-term order intake targets. Potential customers in the petrochemical and natural gas processing industry could well postpone their investment plans further if the climate of uncertainty continues. When it comes to integrated gases projects in the energy sector, the reluctance to invest among customers is also a risk that affects the Gases Division. In the plant construction sector, Linde aims to limit any negative impact by making the most of downturn phases to improve project execution processes for the next upswing.

Risks associated with the provision of services

Risks associated with the provision of services comprise all those risks arising from processes taking place at the operating sites of Linde’s divisions, including the distribution of products and related logistics services. These include safety risks during the production process, production risks such as machinery failure, plant breakdowns and capacity bottlenecks, project risks in plant construction and risks associated with products and services.

Safety risks

The manufacturing of products and construction of plants by the Group may entail risks associated with the production, filling, storage and transport of raw materials, goods or waste. These risks, if not handled appropriately, might lead to personal injury, damage to property or environmental damage, which in turn might result in business interruptions, monetary penalties, compensation payments or environmental clean-up costs. The reputation of The Linde Group could also suffer if any such event were to occur.

Linde strives to be a leader in the areas of safety, health protection and environmental protection. All these aspects are integrated into its management systems. The Group-wide SHEQ (Safety, Health, Environment, Quality) function manages the continuous process of improvement in these areas.

One of the Group’s main preventive strategies is ensuring high safety standards for production processes and service processes. Processes with a particularly high exposure to risk have to comply with strict safety requirements. One of the ways Linde dealt with this was to develop and introduce a Major Hazards Review Programme. This programme is used for the systematic evaluation of risks which might lead to accidents or damage to property or to the environment. It helps the Group minimise the risk of incidents that might occur if the safety levels being maintained in its processes were inadequate and it is constantly being updated so as to address potential new risks. In the Engineering Division, Linde also places great emphasis on the uniform integration of safety, health and environmental protection and quality into plant construction and project execution processes. By applying clearly-structured process-based management standards, the Group ensures that relevant aspects, from the engineering design to the assembly and commissioning of the plants on the project sites, are planned, implemented and monitored.

A risk to Linde’s employees and to the net assets, financial position and results of operations of the Group is also posed by natural disasters, pandemics and terrorist or other criminal attacks. These risks may also have an indirect impact on Linde if the Group’s customers are significantly affected by any of them.

Linde addresses these risks, which are covered in some cases by insurance, via Crisis and Business Continuity Management. In the business units, under the direction of the Group-wide SHEQ function, local risk reduction measures and contingency plans are implemented. The aim is to minimise as far as possible the potential consequences of serious events and to ensure the fastest possible return to normal operations, even in the case of highly improbable events or losses of a grave nature.

Production risks

A business interruption at one of Linde’s main plants or at a customer’s on-site plant could adversely affect the results of operations and reputation of the Group. This would be particularly true if the interruption to the business were to be caused by an accident which also resulted in personal injury or damage to the environment.

Therefore, Linde gives high priority to measures designed to prevent business interruptions. These include, in particular, the monitoring and maintenance of plants so that such incidents may be avoided, and the provision of spare parts of strategic importance. If, despite these preventive measures, a business interruption should occur, the Group has supply networks operating between its production plants so that any business interruption would have only a limited effect or no effect at all on its customers.

In the liquefied gases and cylinder gas product area, the key plants are storage facilities and filling plants. Many of these plants are also important logistics and distribution centres for whole regions, supplying gases from nearby production plants to customers and distribution partners. The availability of storage facilities and filling plants ensures high standards of delivery, short delivery times and minimal transport costs in each region. A business interruption at one of the Group’s main plants might therefore have an adverse impact on various products and a number of different customers in a region. Strict compliance with quality and safety standards and environmental protection standards during the manufacture, storage, transport and use of Linde’s products is an important element in the avoidance of business interruptions. Moreover, the modular construction of the sites and their fitting out with abundant and versatile filling systems contribute to the robustness of the sites and their processes. As with on-site plants, Linde also has a supply network in most regions with filling plants which would help to reduce or avoid the negative impact of a business interruption on a particular site.

Project risks in plant construction

Complex major plant construction projects pose particular problems for risk management. The Group’s Engineering Division handles significant contracts which may be worth several hundred million euros and where construction may take a number of years.

Typically, the division is involved in the design and construction of turnkey plants. Potential risks may arise as a result of the costings and execution of such complex projects which are subject to uncertainty. Risks may include unexpected technical problems, supply bottlenecks and quality problems with suppliers of major components, unforeseen developments during on-site assembly and problems with partners or subcontractors. Such risks may cause project delays and cost overruns. To manage the risks in plant construction, Linde applies methods, already in the tendering phase, to assess the impact on the profitability of a large-scale project of potential variances from budgeted cost for individual components. The Group conducts simulations of the opportunities and risks associated with each project using numerical methods of analysis. By continually monitoring changes in parameters alongside the progress of the project, Linde is able to identify potential project risks at an early stage and to take appropriate measures to counter them. These risk management tools are constantly being updated and modified to meet the increasing demands of the market.

Risks associated with products and services

Risks associated with products and services may in extreme cases result in consequences such as potential liability claims, the loss of customers or damage to the Group’s reputation. Principal possible causes of risks associated with products and services are product defects or an inadequate level of customer care when Linde is providing services, especially in the Gist division or Healthcare product area.

Linde counters such risks by maintaining the safety and high quality of its products, product information and services. To ensure that products are safe, risk management is based on the concept of product stewardship. The potential hazards and risks that might arise for human beings and the environment from a product during its life-cycle are analysed and the relevant potential risk is determined. Linde takes the measures which are necessary to avoid the risks which have been identified or, if that is not possible, to reduce the risks to an acceptable level.

Product stewardship begins at the moment when key raw materials and supplies and services are purchased. The Group favours suppliers who aim to achieve the same high standards in occupational safety, health protection, environmental protection and quality as Linde itself, and who can demonstrate this, for example, by the fact that they have the appropriate management systems in place.

Customers are also involved in safety management. In the Gases Division, Linde conducts customer screenings for critical products prior to delivery. These investigations aim to minimise the risks which might arise from improper handling of the Group’s gases or chemicals.

Linde continually updates its product safety information, such as product safety sheets. The Group takes account of national and international guidelines such as REACH (Registration, Evaluation, Authorisation and Restriction of Chemicals) and GHS (Globally Harmonised System of Classification and Labelling of Chemicals). If, despite all these precautions, problems should arise, the Group’s emergency teams are on stand-by to provide support.

To ensure the highest possible levels of safety for patients over the entire life-cycle of Linde’s pharmaceutical products, such products are monitored on a continuous basis using the Vigilance Signal Detection System. Regular analysis is performed on the safety of pharmaceutical products in Periodic Safety Update Reports (PSURs).

Financial market risks and country risk

Financial market risks

Due to its global operations, Linde is exposed to a number of financial market risks. In particular, these include counterparty risk, liquidity risk and risks arising from movements in interest rates, share prices and exchange rates. These risks continue to be monitored very closely, given the uncertainty in the financial markets, especially in the eurozone.

The basic strategies for the management of interest rate risk, currency risk and liquidity risk and the objectives and principles governing Linde’s financing are determined by the Treasury Committee, led by the Chief Financial Officer This committee usually meets once a month and comprises representatives from Corporate & Support Functions Treasury and Accounting & Reporting.

One of the main criteria for the management of counterparty risk is the credit rating of the counterparty. The Group also monitors changes in other relevant capital market parameters, such as movements in credit default swaps or in the market capitalisation of counterparties. Trading and position limits are defined on this basis. Regular reviews of these limits are performed by a supervisory unit which is independent of the trading entity. Both Linde AG and Linde Finance B. V. also conclude Credit Support Annexes (or CSAs) with their principal banks. Under these agreements, the positive and negative fair values of derivatives are collateralised with cash on a regular basis by the contracting parties. This significantly reduces counterparty risk.

With regard to the management of liquidity risk, Linde has for years pursued a prudent and conservative policy of safeguarding liquidity. As in the past, it has continued to have access to the capital markets in the 2015 financial year. In addition, the EUR 2.5 bn syndicated credit facility which serves as a liquidity reserve and is due to expire in 2019 has been extended by one year as a result of the exercise of one of the options to extend the period for which the facility is available. As a result, Linde has access to agreed unutilised financing commitments of EUR 2.5 bn available until 2020 which are provided by an international banking group. This diversification of financing sources ensures that a concentration of risk in the area of liquidity is avoided.

Interest rate risk arises as a result of fluctuations in interest rates caused by the markets. These fluctuations affect both the interest expense borne by The Linde Group and the fair value of financial instruments. Interest rate risk is centrally managed. On the basis of the operational business model and using the results of sensitivity and scenario analysis, the Treasury Committee determines ranges for the fixed-floating ratio of the financial liabilities and in the main currencies: Euro (EUR), British Pounds (GBP), US Dollars (USD) and Australian Dollars (AUD). Group Treasury manages the rates within the agreed ranges and submits reports to the Treasury Committee about the measures implemented. Methods of hedging exposure to the risk include entering into trading transactions with banks (short-term, medium-term and long-term interest rate derivatives) and using long-term fixed-interest bonds and loans. In 2015, on average 62 percent of the exposure of the Group was financed at fixed rates, while at year-end the figure was 67 percent.

In the case of exchange rate risk, it is important to differentiate between operational transaction risks, which are the result for example of supply contracts for individual transactions or projects spread across different currency zones, and translation risks. Translation risks arise from the currency translation of the financial statements of subsidiaries where those subsidiaries have a functional currency other than the Group reporting currency.

Business operations and financing activities which are not in the local currency inevitably lead to foreign currency cash flows. The Group guideline states that individual business units must monitor the resulting transaction risks themselves and agree appropriate hedging transactions with Group Treasury, based on predetermined minimum hedging rates, provided there are no other reasons not to hedge the exposure in this way.

Translation risks are hedged within authorised ranges. It should be observed that the translation risk arises in respect of operating profit and/or revenue only when the financial statements of Linde’s subsidiaries are translated into the reporting currency (EUR). The use of financial derivatives and, as a result, being prepared to accept considerable volatility in the financial result at the level of the profit for the year may however have a mitigating effect on this risk. In the Group’s view, it is therefore not possible to make a meaningful hedge against the exposure to this particular risk. On the other hand, Linde does hedge against the exposure to currency-related fluctuations in net asset values at Group level.

Hedging decisions are made according to the risk strategies of the Treasury Committee. Forward exchange transactions, cross-currency interest rate swaps, currency options and foreign currency loans are all used here. The main currencies are US Dollars (USD), British Pounds (GBP), Australian Dollars (AUD) and some Eastern European, South American and Asian currencies. In the Gases Division, the Group also uses financial instruments, especially to hedge against exposure to changes in the price of electricity, natural gas and propane gas.

In the project business in the Engineering Division, foreign currency risks are reduced as much as possible by natural hedges: for example, by purchasing supplies and services in the currency of the contract. Any foreign currency amounts over and above this are fully hedged as soon as they arise, generally by entering into forward exchange transactions.

Financing and hedging decisions are based on the financial information obtained from the Group’s treasury management system and its financial and liquidity forecasts. These are embedded in the general financial reporting system, which is also used in the areas of Financial Control and Accounting & Reporting.

With regard to the organisation of the Treasury department, the principle of segregation of duties between the front, middle and back offices is rigorously observed and monitored throughout the risk management process. This means that there is a strict personal and organisational separation between the dealing, the processing and the verification of a financial transaction. Linde uses a treasury management system to implement, record and evaluate transactions. Treasury operations are subject to regular internal and external audits, generally once a year. For further information, see Note [29] of the Notes to the Group financial statements.

In certain countries, companies in The Linde Group have defined benefit commitments to their employees under occupational pension schemes. Depending on the structure of the schemes, one-off payments may be made or the employees may be entitled to a pension for life with an annual increase which may be variable or inflation-linked. As a result, the Group is exposed to risks arising from unexpectedly high rates of inflation or increases in life expectancy.

The amount of the obligation is the actuarial present value of all pension commitments and is expressed as the Defined Benefit Obligation (DBO) under IFRS. The amount of the obligation is subject to annual changes in the valuation assumptions, especially those relating to the discount rate and the rate of inflation. This gives rise to interest rate risks and inflation risks.

In most pension schemes, the obligation is covered by assets which are maintained separately. The worth of the pension assets is subject to fluctuations in the fair value of those assets: e. g. bonds and shares. Therefore, Linde is exposed to market risks, especially interest rate risks, spread risks and equity risks.

The risks relating to pension obligations on the one hand and pension assets on the other, and therefore to the net funding position of pensions, are quantified and evaluated on a regular basis by Linde. There is a natural conflict between a significant reduction of the risk and the achievement in the long term of the return on assets required to keep pace with the potential increase in the obligation.

As a guideline, the Executive Board defines risk tolerance at Group level. Measures designed to modify scheme structure are coordinated by the Global Pension Committee and implemented in the local pension schemes. The impact of various scenarios such as high rates of inflation, recession or deflation on the net funding position of pensions is analysed and incorporated into investment decisions. The Group Investment Panel for Pension Assets assesses the long-term opportunities and risks associated with various asset classes and makes decisions or recommendations regarding the investment strategy of the major pension schemes. The investment panel is chaired by the Chief Financial Officer and receives advice from external experts.

Country risk

A fundamental risk for Linde, as for all companies, is posed by potential radical changes in the political, legal and social environment. Potential risks that Linde might encounter in different countries as a global corporation include the nationalisation or expropriation of assets, legal risks, the prohibition of capital transfers, bad debts with government institutions, war, terrorist attacks and other unrest. Political unrest and wars may also be the cause of indirect risks (economic risks, project risks and risks associated with commercialisation), as a result for example of political and economic sanctions which may extend beyond the borders of the actual region in crisis. For example, the current conflict between Russia and Ukraine might have an impact on Linde’s plant construction in Russia, leading to delays or cancellations relating to the implementation of existing projects. There could also be an indirect negative impact on Linde companies in other countries in the Gases Division and in other markets in the Engineering Division if Linde customers were to change their plans as a result of the unrest or due to the potential escalation of sanctions.

There is the fundamental risk that embargoes are agreed for certain countries in which Linde operates, which could have an adverse impact on existing trading relations or investment plans which are in place even before the embargo comes into force. To manage these risks, Linde employs risk assessment tools to evaluate the Group’s risk situation in terms of the impact of risk on its net assets, financial position and results of operations and to ensure capital adequacy and cross-border financing at optimal levels of risk. At the same time, individual capital expenditure projects are evaluated for political risk, and target returns on investment are set accordingly. On the basis of this evaluation, the risks are covered, if appropriate, by German government guarantees for direct foreign investment, tailored insurance solutions or similar financial instruments available in the market. Counterparty risk for export business is also assessed, and limited if necessary by hedging instruments such as Hermes guarantees.

Regulatory and legal risks

Regulatory risks

Changes in the regulatory environment might have a negative impact on Linde’s costs and international competitiveness. Examples of this are the design of the EU Emissions Trading Scheme and the extra burden being placed on energy-intensive industrial gases production by the increase in electricity prices as a result of additional statutory levies.

In the Healthcare product area, which is largely state-regulated, regulatory changes might also pose risks to Linde which have been described in the section on economic risks above.

The Group is also affected by measures being taken to regulate the international financial markets. In a variety of jurisdictions, Linde must comply with comprehensive rules and reporting requirements when processing financial transactions. Breaches of these rules and requirements may incur significant penalties from the relevant supervisory authorities. Examples which could be quoted here are the Dodd Frank Act in the United States and European Market Infrastructure Regulation (EMIR).

Linde counters these risks by conducting a continuous forward-looking observation and analysis of the legal environment in the various business units and by developing the systems required. In addition, the measures described in the section on risks associated with competition (which are designed to ensure constant customer contact and the development of innovative products and services) contribute towards a reduction in the potential adverse impact of changes in the regulatory environment.

Legal risks

With its international operations, The Linde Group is exposed to numerous legal risks. These may include, in particular, risks relating to product liability, competition and antitrust law, export control, data protection, patent law, procurement law, tax legislation and environmental protection. The outcome of any currently pending or future proceedings can often not be predicted with any certainty. Legal or regulatory judgements or agreed settlements might give rise to expenses which are not covered, or are not fully covered, by insurance benefits. These expenses might have an impact on the Group’s business and its earnings.

Certain companies in The Linde Group are party to various legal proceedings in the ordinary course of business. The outcome of the litigation to which Linde Group companies are party cannot be readily foreseen, but Linde believes that such litigation should be disposed of without material adverse effect on its financial position or results of operations.

Prior to the current accounting period, the Brazilian competition authority CADE imposed fines on a number of gases companies, including Linde’s Brazilian subsidiary, on the grounds of alleged anti-competitive business conduct in the years 1998 to 2004. Seen from today’s perspective, Linde assumes that this decision will not stand up to judicial review.

Certain subsidiaries in The Linde Group are party to lawsuits in the United States, including some in which claims for damages in high amounts have been asserted, for alleged injuries arising from exposure to manganese, asbestos and/or toxic fumes in connection with the welding process. In these cases, the subsidiaries are typically one of several or many other defendants. Based on the litigation experience to date, together with current assessments of the claims being asserted and applicable insurance, Linde believes that the continued defence and resolution of the welding fumes litigation will not have a material adverse effect on the financial position or results of operations of the Group. Nonetheless, the outcome of these cases is inherently uncertain and difficult to predict. The subsidiaries have insurance that covers most or part of the costs and any judgements associated with these claims. The legal actions described above are those currently considered to involve major legal risks. They do not necessarily represent an exhaustive list.

Strategic risk

Linde’s long-term growth targets are based inter alia on the growth areas of energy, the environment and health, as well as on dynamic trends in the fast-growing economies.

Achieving the growth targets entails risks both within and outside the Group. Risks arise on the one hand from uncertainty about the future evolution of these growth areas, which are influenced by political, social, legal and economic factors.

On the other hand, there are also risks associated with the internal measures adopted by the Group to achieve its targets. These include strategic initiatives, e. g. the expansion of the product portfolio, acquisition and investment projects and dealing with a broader understanding of the term “innovation”. The risks associated with such projects are principally the result of the uncertainty attached to assumptions about the future development of the underlying business model and to the amount of the net investment in an acquisition project or the net cash inflow from an investment project. Investments in tangible assets, acquisitions and sales are discussed and approved by the investment committee or at meetings of the Executive Board. At the beginning of the project, careful consideration is given to the assumptions about the project, the feasibility of the project and the specific risks attached to that project. The Group evaluates, for example, country risk and currency risk, the credit ratings of individual customers and trends in the local (gases) markets, as well as the underlying terms and conditions of the contract and the cost of the investment.

In addition, the Executive Board, the Supervisory Board and Group management personnel hold regular meetings to evaluate the extent to which targets associated with strategic initiatives have been achieved and then implement any corrective measures required. This also involves Linde paying close attention to global economic trends, so that it can take the necessary steps to adapt to changing conditions, by adjusting the timeframe or geographical application of its targets.

Overexposure to a single region, customer segment or a particular technology might, for example, have an adverse impact on Linde’s net assets, financial position and results of operations and on its future growth prospects if the assumed overall circumstances change, i. e. in a situation where economic conditions worsen or customers fail to extend their contracts. To counter this risk, the Group applies portfolio management to define and monitor target ranges for its investments. In addition, Linde’s integrated business model means that it is in a position to offer its customers different construction and operator models and thus to manage its concentration risk.

Purchasing and supply chain risks

A key element in the success of the business units is the ready availability of products and services purchased by Linde, which must be of suitable quality, and obtainable in appropriate quantities at prices in line with market conditions. This applies not only to certain gases which Linde does not produce itself, but also in particular to material groups which are dependent on raw materials such as steel, aluminium and brass as well as energy.

To reduce risk, Linde pursues a portfolio strategy across the entire Group. This strategy is organised on the basis of defined groups of materials, which are used to categorise all products and services. Reviews are performed for each group of materials to ascertain security of supply, any dependence on suppliers and the supplier portfolio. The Group develops appropriate purchasing strategies using the category management method. The global purchasing organisation and the regional and local purchasing organisations are involved in this process, from the development of strategy to its implementation in the relevant country, so that the information available about local markets can be incorporated into the development of purchasing strategies.

Methods of best practice adopted centrally and supplier selection and evaluation tools are used throughout the Group to support the purchasing organisations.

In addition to adopting purchasing strategies based on groups of materials, Linde is continuing to optimise its supplier portfolio and the contract status of its suppliers so as to minimise purchasing risks. For products and services where the price depends to a great extent on volatile primary markets, the cost risks are minimised by using time-optimised agreements. An example of this is the purchase of energy. On the purchasing side, the impact of price volatility risks relating to the procurement of electricity and natural gas is cushioned by long-term purchasing strategies in the deregulated energy markets. Linde’s procurement activities in the relevant wholesale energy markets are governed by a global risk guideline which determines the ranges for price hedging over the next few years. Compliance with the guideline is monitored by a global committee. Data transparency is established by means of a professional IT tool for the energy trade. Furthermore, on the sales side, due to the amount of energy consumed in industrial gases production, fluctuations in the price of electricity and natural gas are passed through to customers using appropriate price formulas.

When Linde purchases gases, it counters procurement risks and price risks by means of strict technical apportionment (purchase, own production or purification of gases) and geographical distribution. Unforeseen fluctuations in sales volumes can thus be offset. Where take-or-pay agreements have been concluded with gases suppliers, sales risks might possibly arise for the Group if it has not also entered into corresponding agreements with customers. Linde has established management processes to identify, evaluate and, if necessary, limit such risks.

Risks may arise for The Linde Group if long-term procurement contracts are not matched by sales contracts covering a similarly long period. The risks of fluctuations in demand and prices on the sales side are therefore considered by Linde before it enters into long-term purchase contracts.

IT risks

Many processes in the Linde organisation are dependent on the reliability of the IT infrastructure, software applications and data. Therefore, breakdowns or interruptions in the relevant systems or data loss generally have a negative impact on business processes or production. Longer-term shutdowns or critical data loss could adversely affect the net assets, financial position and results of operations of the Group. Breaches of data protection rules, unauthorised data retrieval or the loss of personal data or sensitive corporate data might result in compensation claims, penalty charges, competitive losses and long-term damage to reputation and a loss of confidence in the company.

The current state of the existing security measures is monitored via a Security Reporting process and is reviewed by the IT internal audit department and external IT auditors. These regular assessments and audits identify any amendments and improvements that might be required, thus contributing to continuous, sustainable improvement in the effectiveness of the security measures. The protective measures have been combined to form a multi-stage defence of the systems and data against attacks from outside (malware infection, cyber attacks, invasion attempts). An internal process is used on a regular basis to identify sensitive applications and IT infrastructures which are then subjected to special penetration tests with the help of external experts. There are also specific protective precautions for the networks to reduce the risk of a computer virus spreading from a production site to plant control systems or other production sites. In 2015, further protective measures were also taken allowing the active identification of unusual data traffic in the networks in order to pinpoint the possible start of a malware infection. In order to ensure that systems can be restored within a reasonable period in the event of catastrophic failures or data loss, business-relevant applications run in global data centres that back the data up to remote locations. Emergency recovery plans are tested on a regular basis to make certain that they are workable.

The Group is continually adopting measures to keep the current IT landscape (including software applications) technically up to date, based on a long-term programme of consolidation. This will make a significant contribution towards ensuring information security and the provision of adequate support for the Group’s business processes. To counter the risk that insufficient resources and expertise will be available to maintain company-specific application software developed in-house (which might mean, in the worst-case scenario, that business-critical processes were inadequately supported), Linde has devised a standardised process for the development, testing and use of application software.

The IT project LEAP (Linde Excellence across Processes) is a major strategic company initiative with the aim of achieving synergy effects thanks to the global standardisation of business processes within The Linde Group. There are some project risks attached to the project, due to its size and to the fact that some of the applications are business-critical and will be affected when the project is implemented. In the current roll-out phase of Linde Template to the operating units, there is the risk that, when the changeover from the current processes to the standardised processes takes place, complications might arise in some countries. In the worst case, these might result in breakdowns or temporary interruptions in business processes. To counter this risk, the initiative is being introduced sequentially in different countries. Moreover, in each country where the changeover is taking place, change management techniques will be used to involve the personnel responsible in planning and preparing for it before the operation actually commences. The Group will therefore be able to benefit from the experience it has acquired in countries which have already adopted the new Linde Template.

Personnel risks

The success of the Group is dependent on the commitment, motivation and skills of its employees and executives. The principal risk factors associated with attracting well-qualified staff and ensuring their long-term loyalty to the Group are the ever-increasing shortage of skilled personnel and fierce competition in the labour market. Competition for employees of the right calibre is now becoming even more intense, especially in the Asian markets.

The volatile and demanding market environment means that Linde needs to have the ability to make constant improvements in its processes and to act swiftly to adapt its organisational structure to keep up with rapidly changing industry requirements. Each individual employee has to be ready and willing to embrace change. This attitude is an essential prerequisite for the successful implementation of the processes of change. For Linde, maintaining a relationship with employee representatives and trade unions which is based on mutual trust and constructive cooperation plays a particularly significant role here.

To address these risk factors, the Group is adopting a holistic approach towards attracting and supporting its employees. The approach is based on Linde’s corporate culture and corporate values, which seek to strike a balance between trust and supervision and which focus on employee development. The Group places special emphasis on its employees assuming personal responsibility and thinking and acting in an entrepreneurial way.

In past years, Linde has paid particular attention to well-targeted succession planning for management positions, establishing personnel development schemes as a result. Staff development, the cornerstone of long-term employee loyalty, enhances the skills of management personnel and fosters their commitment to the Group. Key aspects of Linde’s management development programme are the variety of opportunities on offer for professional development, the provision of support and advice to target groups, mentoring and coaching programmes, the early identification and advancement of high achievers and those with potential, and attractive remuneration packages in line with market rates.

Linde’s staff development schemes is supplemented by extensive opportunities for gaining qualifications and for professional development. This comprehensive programme strengthens its position as an attractive employer in the competitive market for skilled workers. The Group is drawing up new professional development schemes for engineering in particular, further enhancing its attractiveness as an employer.

Linde also trains graduate engineers on university courses with a work experience element and is dealing with the shortage of engineers by continuing to develop its own in-house training schemes. By applying these measures and collaborating more closely with selected higher education institutions, the Group is able to offer skilled employees excellent professional prospects.

Research and development risks

The capacity to innovate is key to the success of a technology company such as Linde. The Group’s research and development activities focus not only on improvements in existing customer processes, but also on new technologies and gases applications which may form the basis for future business success. Linde is concentrating in particular on the following growth areas: energy and the environment, metallurgy, food, health and new materials. One key aspect for Linde is a broader understanding of the term “innovation” and the promotion of a comprehensive innovation culture. This also includes organisational development, i. e. the way in which Linde will do business with its customers using innovative products and services in the future, and how new technologies such as digitalisation can be used to further boost the efficiency and customer focus of internal corporate processes, allowing Linde to set itself apart from the competition.

Innovative projects differ from normal capital expenditure projects because of their novelty. Generally, the more innovative the project, the greater the risks attached to it. Despite the great opportunities for growth which may be presented by the activities of Linde’s research departments, there is a risk that, due to the high level of complexity of the technologies and markets and the fast rate of change associated with them, projects might be postponed, or might not be able to proceed for technological, economic, legal, patent law or safety reasons. The collaboration with research and development partners can give rise to additional risks to the project’s success, e. g. the risk that a partner might become insolvent. On the other hand, there is also the risk that competitors might develop new technologies faster or in a more sustainable manner and then launch them onto the market and of this presenting a threat to Linde’s core technologies. In order to be even more effective in combating these risks throughout the entire innovation process, from the generation of ideas to the profitable marketing of innovative products and services, Linde has taken organisational measures to improve the use of innovative power and competencies on the application development rise and to pursue an even more systematic approach to developing opportunities. The area of innovation has been combined across the Group in the Corporate & Support Function Technology & Innovation (T & I). This unit monitors major technological trends, checking continually whether innovative ideas within the Group are a good fit with Linde’s overall strategy and have the potential to generate profitable growth. This work is supported by cooperation with leading companies and universities and by strategies to protect the Group’s intellectual property. T & I also coordinates Linde’s participation in the work of standard-setting bodies and associations and its representation on many relevant industry committees, such as those concerned with hydrogen technology. The Group is actively involved in the development of future standards, as the marketing of innovations may depend on compliance with those standards. The Corporate & Support Function T & I is also responsible for application development, which is embedded in the operating segments, ensuring the necessary degree of proximity to customers. Company-wide initiatives, in the area of digitalisation, for example, are also managed centrally by this department.

Environmental risks

As discussed in the section on Safety risks above, the Group’s various operating processes in particular are also associated with risks which might lead to environmental damage. Linde understands and knows about the environmental impact of its processes and is therefore in a position to develop and implement plans to limit and control such effects. The Group focuses in particular on reducing emissions and on making continual improvements to its operations to ensure the efficient use of resources, materials and energy. Linde is involved, for instance, in improving the energy efficiency of its production plants and in increasing the performance of its transport fleet. However, the possibility that the Group’s activities might lead to environmental damage or that remediation works might cost more than originally budgeted cannot be completely ruled out.

Tax risks

As a group with global operations, Linde is governed by the tax rules and regulations applicable in each country in which it operates. When tax rules change, this may result in a higher tax expense and the need to make higher tax payments. In addition, changes in tax legislation may have a significant impact on the Group’s tax receivables and tax liabilities as well as on its deferred tax assets and deferred tax liabilities. Moreover, uncertainty about the tax environment in some regions may restrict the Group’s opportunities to enforce its rights under the law. Linde also operates in countries with complex tax regulations which could be interpreted in different ways. Future interpretations of these regulations and/or changes in the tax system might have an impact on the tax liabilities, profitability and business operations of the Group. Linde is regularly audited by the tax authorities in various jurisdictions. Tax risks which might arise from the issues discussed above are identified and evaluated on an ongoing basis by the Group.

Executive Board summary of the risk situation

The three major risk areas for the Group continue to be economic risks, risks associated with the provision of services and financial market and country risks. As far as the risk categories of moderate relative significance are concerned, strategic risks moved down the rankings year-on-year to fall behind regulatory and legal risks, while procurement and supply chain risks moved up two positions, overtaking IT risks, since the previous year.

When it comes to the risk categories at the lower end of the ranking, research and development risks have moved up two notches since the previous year, while tax-related risks have fallen to the very bottom of the rankings. Since the risk categories in the middle and at the bottom of the rankings are very close to each other in terms of their ranking, the risk situation for Linde on the whole has not changed to any considerable degree compared with the previous year.

Given the risk management procedures in place, the Executive Board has not identified any risks in the 2015 financial year which might, individually or in total, have an adverse impact on Linde’s net assets, financial position and results of operations and thereby on the viability of Linde as a going concern.

If there were to be a change in circumstances, risks which are currently unknown or deemed to be immaterial might gain in importance. Linde has made the organisational arrangements necessary to ensure that it becomes aware at an early stage of any apparent changes in risk situations and makes an appropriate response to such changes.