Linde plc — Q2 2019 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2019. Amounts are in U.S. dollars; financial statements are unaudited.
Business context and comparability
Linde supplies industrial and process gases and operates an Engineering business. Praxair and Linde AG combined on October 31, 2018, with Praxair treated as the accounting acquirer. Consequently, 2019 reported results include the combined business, while 2018 reported results include Praxair only; reported year-over-year comparisons are therefore materially distorted. Management provides supplemental pro forma comparisons assuming the merger and required divestitures occurred before the periods shown. These non-GAAP, illustrative figures are not forecasts and exclude potential synergies.
The company reports Americas, EMEA, APAC and Engineering segments. The U.S. hold-separate restrictions were lifted March 1, 2019.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Six months 2019 | Six months 2018 |
|---|---|---|---|---|
| Reported sales | $7.204 billion | $3.044 billion | $14.148 billion | $6.027 billion |
| Pro forma sales | $7.179 billion | $7.178 billion | $14.093 billion | $14.119 billion |
| Reported operating profit | $669 million | $689 million | $1.278 billion | $1.342 billion |
| Income from continuing operations attributable to Linde | $513 million | $480 million | $948 million | $942 million |
| Reported diluted EPS from continuing operations | $0.94 | $1.65 | $1.73 | $3.24 |
| Adjusted pro forma operating profit | $1.319 billion | $1.246 billion | $2.541 billion | $2.452 billion |
| Adjusted pro forma operating margin | 18.4% | 17.4% | 18.0% | 17.4% |
| Adjusted pro forma diluted EPS | $1.83 | $1.63 | $3.52 | $3.14 |
Pro forma sales were essentially flat in Q2 and down 0.2% for the first half. Management attributed the Q2 outcome to 2% volume growth and 2% price/mix growth offset by 4% unfavorable currency translation. Adjusted pro forma operating profit increased 6% in Q2 and 4% year to date; adjusted pro forma EPS rose 12% in both periods. These adjusted measures exclude specified purchase-accounting and other items and should be considered alongside GAAP results.
Reported operating profit included Linde AG purchase-accounting charges of $515 million in Q2 and $1.046 billion in the first half, mainly additional depreciation and amortization. Cost-reduction and other charges were $141 million in Q2 and $230 million year to date. Reported diluted EPS also reflects the substantially larger post-merger share count. Q2 discontinued-operations income was $9 million; first-half income was $91 million.
Segment pro forma trends were mixed: Q2 sales and operating profit rose 4% and 3% in Americas, fell 6% and 6% in EMEA, and fell 2% in sales but rose 12% in operating profit in APAC. Engineering sales declined 3%, while operating profit increased 27%. Management cited pricing and volumes as supports, with currency, cost inflation and softer EMEA conditions as offsets.
Cash flow, debt and liquidity
- Operating cash flow: $2.073 billion for the first half, up from $1.478 billion; management cited higher earnings and noncash adjustments, partly offset by working-capital needs and other asset/liability changes.
- Capital expenditures: $1.708 billion, versus $676 million in the prior-year period. Investing cash flow was positive $2.841 billion, largely reflecting divestiture proceeds of $4.689 billion.
- Cash and equivalents: $2.686 billion at June 30, down from $4.466 billion at year-end 2018.
- Debt: $13.957 billion total, including $1.475 billion short-term debt; net debt was $11.271 billion, compared with $10.830 billion at year-end.
- Financing and shareholder returns: Financing used $6.645 billion, including about $3.2 billion for the Linde AG minority-share squeeze-out, $1.311 billion in long-term debt repayments, $1.250 billion in share purchases and $951 million in dividends.
- Available committed credit: A new unsecured revolving facility provides $5.0 billion, expandable to $6.5 billion, with no borrowings outstanding at June 30. It matures in 2024, with two possible one-year extensions.
Outlook, material developments and risks
The filing gives no specific numerical earnings or sales guidance. Linde reported a $4.7 billion backlog of large projects under construction at June 30, primarily in APAC (62%) and the Americas (31%); management presents the backlog as one indicator of future sales growth. The projects mainly serve electronics, chemicals and energy customers.
The merger-related divestitures generated substantial cash proceeds: the Linde AG Americas business sale closed March 1, 2019, and selected Linde Korea assets were sold April 30. Linde completed the sale of selected Linde India assets for $218 million on July 12, 2019, subject to customary adjustments. Certain other required Asia divestitures were expected during 2019.
The company estimated 2019 pension contributions of $95 million to $160 million, of which $43 million had been paid through June 30. Cost-reduction actions targeted approximately 1,100 positions, with about 700 separations completed by quarter-end; most actions were expected to finish in 2019. Estimated cash needs for cost-reduction and other charges were about $225 million, with $135 million paid by June 30.
Risks highlighted include integration and synergy execution, regulatory limits and required divestitures, global economic and trade developments, currency and interest-rate movements, energy and raw-material costs, competition, litigation, and environmental, tax and regulatory matters. Management said risk factors had not materially changed from the 2018 Form 10-K. It also said aggregate losses from legal matters were not expected to materially affect financial position or liquidity, although outcomes could affect results in a particular period.
Notable contingencies include approximately $210 million of estimated Brazilian tax claims for which no liability was recorded, based on management’s assessment and outside counsel; Brazilian antitrust fines that management said were unlikely to result in cash outflows; and German appraisal proceedings by former Linde AG shareholders, for which no reserve was established. The merger purchase-price allocation remained preliminary, with further adjustments possible during the measurement period.
Key investor verification points
- Assess performance using the supplemental pro forma and adjusted figures as well as GAAP results; verify the exclusions and the effects of divestitures, currency and purchase accounting.
- Track integration, realized synergies, cost-reduction execution and the remaining merger-related divestitures.
- Monitor the $4.7 billion project backlog for conversion into revenue, cash flow and returns on the elevated capital-spending program.
- Reconcile cash generation with divestiture proceeds, the squeeze-out payment, buybacks, dividends and debt repayments; monitor net debt and liquidity.
- Follow resolution and potential exposure from the Brazilian tax matters, antitrust proceedings and Linde AG shareholder appraisal claims.
- Review final purchase-accounting allocations and the resulting depreciation and amortization burden.