Linde plc — Form 10-Q Summary
Business context and reporting period
Quarter ended September 30, 2019; balance-sheet data are as of September 30, 2019. Linde supplies industrial and process gases and operates an Engineering business. The October 31, 2018 Praxair–Linde AG merger materially affects comparability: 2019 reported results include the combined company, while 2018 reported results include only Praxair. Pro forma results are more useful for year-over-year comparison, but are non-GAAP or illustrative measures and are not a substitute for GAAP results.
Key financial metrics
| Metric | Q3 2019 | Q3 2018 | Nine months 2019 | Nine months 2018 |
|---|---|---|---|---|
| Reported sales ($ millions) | 7,000 | 3,008 | 21,148 | 9,035 |
| Pro forma sales ($ millions) | 6,993 | 6,942 | 21,086 | 21,061 |
| Reported operating profit ($ millions) | 1,000 | 669 | 2,278 | 2,011 |
| Adjusted pro forma operating profit ($ millions) | 1,384 | 1,188 | 3,925 | 3,640 |
| Reported income from continuing operations attributable to Linde ($ millions) | 728 | 461 | 1,676 | 1,403 |
| Reported diluted EPS from continuing operations | $1.34 | $1.58 | $3.07 | $4.82 |
| Adjusted pro forma diluted EPS from continuing operations | $1.94 | $1.54 | $5.46 | $4.68 |
| Operating cash flow ($ millions) | Not presented | Not presented | 3,945 | 2,349 |
| Capital expenditures ($ millions) | Not presented | Not presented | 2,667 | 1,056 |
Q3 reported operating margin was 14.3%, versus 22.2% in the prior-year quarter; adjusted pro forma operating margin was 19.8%, versus 17.1%. Adjusted pro forma EBITDA margin was 30.0%, versus 27.7%. For the nine months, reported operating margin was 10.8%; adjusted pro forma operating margin was 18.6%, versus 17.3%. Reported effective tax rates were 29.8% for Q3 and 26.9% year to date.
At September 30, cash and equivalents were $2.120 billion and total debt was $13.201 billion, compared with $4.466 billion and $15.296 billion, respectively, at December 31, 2018. Net debt was $11.081 billion, versus $10.830 billion at year-end. Current assets were $9.812 billion and current liabilities $10.883 billion. A $5.0 billion unsecured revolving credit facility, expandable to $6.5 billion, had no borrowings outstanding and matures in 2024, with two optional one-year extensions.
Material changes versus the prior comparable period
- On a pro forma basis, Q3 sales increased 1%; higher volume and pricing were partly offset by unfavorable currency translation and lower cost pass-through. Nine-month pro forma sales were essentially flat.
- Adjusted pro forma operating profit rose 16% in Q3 and 8% year to date; adjusted pro forma diluted EPS rose 26% and 17%, respectively. Management cited pricing, volume and productivity improvements, partly offset by currency effects and cost inflation.
- Reported EPS declined despite higher reported income from continuing operations, principally because the merger substantially increased weighted-average shares. The pro forma adjusted measures also reflect specified exclusions, including purchase-accounting charges.
- Operating cash flow increased $1.596 billion year to date. Capital spending was $2.667 billion; investing cash flow included $4.960 billion in divestiture and asset-sale proceeds. Financing cash outflows included $3.2 billion for the Linde AG minority-share squeeze-out, $1.934 billion of share purchases, and $1.422 billion of dividends.
Outlook, management commentary, risks and unusual items
- Linde reported a sale-of-gas project backlog of $4.7 billion at September 30, primarily in APAC (62%) and the Americas (31%). The filing describes the backlog as estimated capital cost of large plants under construction, not as contracted future revenue. No specific earnings or revenue guidance is stated in the supplied filing text; management directs investors to quarterly releases and calls for updates.
- Q3 included a $164 million gain on the sale of selected Praxair India assets. Cost-reduction and other charges were $125 million for the quarter and $355 million year to date. These included a roughly $73 million APAC joint-venture impairment following an unfavorable arbitration ruling. The company estimated approximately $266 million in cash requirements for these charges, of which $192 million had been paid by quarter-end.
- Purchase accounting reduced reported operating profit by $425 million in Q3 and $1.471 billion year to date, primarily through additional depreciation and amortization. The merger purchase-price allocation remained preliminary; further adjustments were expected in Q4 2019.
- Merger-related regulatory divestitures continued: major Linde AG Americas and South Korean business sales closed in March and April 2019, and selected Praxair India assets were sold in July. Certain other Asian divestitures were expected in 2019 and 2020.
- Brazilian tax claims had estimated exposure of approximately $200 million; Linde had not accrued a liability and was contesting the claims. Other disclosed matters include Brazilian antitrust appeals and German appraisal proceedings; management reported no reserve for these matters. The company cautioned that litigation outcomes could affect results in a given period, though it did not expect aggregate losses to materially affect consolidated financial position or liquidity.
- Key stated risks include merger integration and synergy execution, regulatory constraints and divestitures, economic and trade developments, currency and interest-rate movements, energy and input costs, pricing, competition, customer performance, litigation, and cybersecurity or systems disruption. The filing reported no material change to the risk factors in the 2018 Form 10-K.
Important facts for investors to verify
- Use pro forma and adjusted pro forma comparisons carefully: confirm the reconciliation and exclusions, and do not compare 2019 reported results directly with 2018 reported results as if the business scope were unchanged.
- Track completion, proceeds and accounting treatment of remaining regulatory divestitures, and whether reported backlog converts into projects, sales and cash flow.
- Assess merger integration, synergy realization, restructuring cash requirements and the duration of purchase-accounting impacts.
- Monitor cash generation against capital expenditures, dividends, buybacks, debt repayments and remaining authorized repurchases; review net debt and available revolving-credit capacity.
- Follow developments in the APAC arbitration-related impairment, Brazilian tax and antitrust matters, and German appraisal proceedings, including any change in accruals or estimated exposure.