Linde plc — 2019 Form 10-K Summary
Reporting period: Fiscal year ended December 31, 2019. The filing is an annual report, not a standalone fourth-quarter filing. Amounts are in U.S. dollars unless noted.
Business context and comparability
Linde is a global industrial gases and engineering company formed through the October 31, 2018 combination of Praxair and Linde AG. It supplies atmospheric and process gases, and designs and builds industrial gas plants. The 2019 results include both businesses for the full year; 2018 includes Praxair for the full year but Linde AG only from the merger date. Accordingly, reported year-over-year comparisons are materially distorted by the merger, divestitures and purchase accounting. Management provides supplemental pro forma and adjusted pro forma comparisons, which are non-GAAP or illustrative measures.
Key financial metrics
| Metric | FY 2019 | FY 2018 |
|---|---|---|
| Sales | $28.228 billion | $14.836 billion |
| Operating profit (GAAP) | $2.933 billion | $5.247 billion |
| Income from continuing operations | $2.183 billion | $4.273 billion |
| Diluted EPS from continuing operations | $4.00 | $12.79 |
| Cash flow from operations | $6.119 billion | $3.654 billion |
| Capital expenditures | $3.682 billion | $1.883 billion |
| Total debt | $13.956 billion | $15.296 billion |
| Cash and cash equivalents | $2.700 billion | $4.466 billion |
- Reported sales rose 90%, primarily because the merged business was included for a full year. On a pro forma basis, sales were nearly flat at $28.163 billion versus $28.084 billion; underlying growth reflected higher prices and volumes, offset by currency and lower cost pass-through.
- Reported operating profit included $164 million of divestiture gains, $567 million of cost-reduction and other charges, and $1.952 billion of purchase-accounting impacts. The prior year included a $3.294 billion divestiture gain. Adjusted pro forma operating profit increased 10% to $5.272 billion; adjusted pro forma operating margin was 18.7%, versus 17.1%.
- Adjusted pro forma income from continuing operations was $4.003 billion, up 17%; adjusted pro forma diluted EPS was $7.34, up 19%. These are non-GAAP measures and should not be confused with reported GAAP results.
- Operating cash flow was 22% of reported sales. Investing cash flow was positive $1.189 billion, including $5.096 billion of divestiture and asset-sale proceeds; financing cash outflow was $8.997 billion. Cash declined by $1.766 billion during the year.
- Net debt was $11.256 billion, up $426 million from 2018, mainly due to lower cash balances despite debt repayments. A $5 billion revolving credit facility was undrawn at year-end; management said liquidity was sufficient. Long-term debt ratings were A (S&P) and A2 (Moody’s).
- The annual dividend was $3.50 per share. The company repurchased $2.3 billion of shares under its 2019 authorization and had approximately $3.7 billion remaining at year-end.
Fourth-quarter detail
For Q4 2019, sales were $7.080 billion, operating profit was $655 million, net income attributable to Linde plc was $511 million, and income from continuing operations was $507 million. Diluted EPS from continuing operations was $0.94. Q4 2018 included a large divestiture gain, so its reported figures are not a like-for-like comparison.
Outlook, commentary and risks
- The filing provides no clear numeric 2020 earnings or EPS guidance. At year-end, the sale-of-gas backlog of large projects under construction was $4.4 billion, concentrated in APAC (64%) and the Americas (29%), primarily serving energy, chemical and electronics customers.
- Management cited pricing, project start-ups, productivity and cost-reduction actions as supports to performance; currency headwinds, cost inflation and weaker industrial production in parts of EMEA were offsets.
- Merger integration and realizing expected synergies remain key risks. Certain regulatory divestitures in Asia were still expected in 2020. The company recorded $567 million of cost-reduction and other charges in 2019, including an approximately $73 million impairment tied to an unfavorable arbitration ruling involving an APAC joint venture.
- Other material risk areas include economic and industry cycles, energy and raw-material costs and availability, foreign exchange, regulation and tax changes, cyber and operating disruptions, pension assumptions, litigation, and potential impairment of acquisition-related assets. Goodwill was $27.019 billion; no impairment was recorded in 2019.
- Defined-benefit pension plans had funded deficits of $504 million in the U.S. and $1.801 billion internationally. Expected 2020 pension contributions were $50–$80 million; pension expense excluding settlements was expected to be a benefit of approximately $45 million.
- Significant contingencies include approximately $260 million of Brazilian tax claims for which no liability was recorded, and German appraisal proceedings relating to the Linde AG minority-share squeeze-out. Management did not expect aggregate contingency losses to materially affect financial position or liquidity, but outcomes could affect results in a period.
- The auditor issued unqualified opinions on the financial statements and internal control. However, Linde AG was excluded from the 2019 internal-control assessment and audit of controls; it represented approximately 23% of year-end assets and 62% of annual sales.
Most important facts for investors to verify
- Reconcile GAAP performance with the company’s adjusted pro forma measures, including the effects of purchase accounting and the prior-year divestiture gain.
- Track merger-related integration costs, synergy delivery and remaining regulatory divestitures, particularly those expected in Asia.
- Assess the conversion of project backlog into revenue and cash, including Engineering contract cost estimates and project execution.
- Monitor debt, cash generation, capital spending, share repurchases and dividends against liquidity needs and contractual commitments.
- Review pension funding sensitivity, goodwill impairment headroom, unresolved tax and legal matters, and the progress of internal-control integration at Linde AG.