Linde plc — Q2 2021 Form 10-Q
Business context and period. Unaudited quarterly report for the three and six months ended June 30, 2021, compared with the corresponding 2020 periods. Linde supplies industrial gases and engineering services across the Americas, EMEA, APAC, and other businesses. Amounts below are in U.S. dollars.
Financial performance
| Metric | Q2 2021 | Q2 2020 | Six months 2021 | Six months 2020 |
|---|---|---|---|---|
| Sales | $7.584bn | $6.377bn | $14.827bn | $13.116bn |
| Operating profit, reported | $1.142bn | $591m | $2.355bn | $1.324bn |
| Reported operating margin | 15.1% | 9.3% | 15.9% | 10.1% |
| Adjusted operating profit (non-GAAP) | $1.837bn | $1.317bn | $3.525bn | $2.669bn |
| Adjusted operating margin (non-GAAP) | 24.2% | 20.7% | 23.8% | 20.3% |
| Net income attributable to Linde | $841m | $458m | $1.821bn | $1.031bn |
| Diluted EPS, continuing operations | $1.60 | $0.87 | $3.46 | $1.93 |
| Adjusted diluted EPS (non-GAAP) | $2.70 | $1.90 | $5.19 | $3.78 |
Q2 sales rose 19%: volume contributed 15%, price/mix 3%, currency 6%, and cost pass-through 2%, partly offset by a 3% reduction from acquisitions/divestitures, primarily the APAC joint-venture deconsolidation, and a 4% decline in Engineering. For the first half, sales increased 13%, including 9% volume growth, 2% price/mix, and 5% currency contribution.
Management attributed adjusted operating-profit growth chiefly to higher volumes and pricing, productivity, and cost-reduction initiatives. Adjusted EBITDA was $2.585bn in Q2 and $5.023bn for the first half, compared with $2.016bn and $4.065bn, respectively.
Cash flow, debt, and liquidity
- First-half operating cash flow was $3.936bn, up 27% year over year. Working capital used $360m, primarily reflecting higher cash taxes.
- Capital expenditures were $1.506bn; investing cash outflow was $1.460bn. Financing cash outflow was $3.115bn, including $2.050bn of net share repurchases and $1.102bn of dividends.
- Cash was $3.137bn at June 30, 2021, versus $3.754bn at year-end 2020. Total debt was $15.492bn, down from $16.154bn; net debt was $12.355bn versus $12.400bn.
- Short-term debt was $3.681bn and current long-term debt was $1.827bn. The company had no borrowings against its $5bn unsecured revolving credit facility, which expires in 2024 and has no financial maintenance covenants.
- Current assets were $10.446bn and current liabilities $14.676bn. Management stated it believes cash, operating flexibility, and funding sources are sufficient to meet business needs.
Material changes and unusual items
- Reported results include Linde AG purchase-accounting impacts of $491m in Q2 and $974m for the first half, and cost-reduction and other charges of $204m and $196m, respectively. These adjustments explain much of the difference between reported and adjusted operating profit; the adjusted measures are non-GAAP.
- First-half cost-reduction charges were partly offset by a $52m gain from deconsolidating an APAC joint venture effective January 1, 2021. No consideration was received. The venture contributed approximately $600m of 2020 sales; its deconsolidation reduced 2021 sales growth by about 3 percentage points and APAC operating profit by $56m for the first half.
- Severance charges were $182m in Q2; about half of planned actions had been taken by June 30, with remaining actions expected to be completed by Q1 2022. Estimated cash requirements for cost-reduction and other charges were approximately $223m, payable through 2023.
- The first-half effective tax rate was 24.9% reported and 24.3% adjusted. Current-period tax charges included $81m from a UK tax-rate increase, partly offset by a $33m tax-settlement benefit.
- Engineering sales fell 20% in Q2 and 7% year to date, mainly due to project timing. Americas, EMEA, and APAC sales and segment operating profit increased year over year.
Outlook, risks, and contingencies
The 10-Q gives no specific numerical earnings guidance; it directs investors to the company’s quarterly earnings releases and investor teleconferences for guidance and updates. Management cited continued price, volume, and productivity benefits. The sale-of-gas backlog of large projects under construction was approximately $3.4bn at June 30; this is estimated plant capital cost, not contracted revenue.
Management highlighted exposure to economic conditions, foreign exchange and interest rates, energy and raw-material costs, pricing, competition, regulation, litigation, cybersecurity, pandemics, and integration of acquisitions. The filing reported no material changes to the risk factors in the 2020 Form 10-K. Management did not expect aggregate litigation and investigation losses to materially harm consolidated financial position or liquidity, though outcomes could affect results in a particular period. Brazilian tax claims had an estimated exposure of approximately $220m and no liability was recorded; other Brazil antitrust proceedings and German shareholder appraisal proceedings remain pending, with no reserves recorded for the matters described.
Important facts for investors to verify
- Reconcile GAAP and non-GAAP performance, particularly the recurring purchase-accounting charges and cost-reduction adjustments.
- Track conversion of operating cash flow into cash after capital spending, dividends, and the share-repurchase program; the board authorized up to $5bn of repurchases through July 31, 2023.
- Monitor debt maturities and liquidity: $3.681bn of short-term debt and $1.827bn of current long-term debt were reported at quarter-end.
- Assess the ongoing impact of the APAC joint-venture deconsolidation and the project-timing-driven weakness in Engineering.
- Review the status and potential outcomes of the approximately $220m Brazilian tax exposure, other disclosed litigation, and estimated restructuring cash payments.