Linde plc — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Linde supplies industrial gases globally and also operates an engineering business. Unless noted, amounts are in U.S. dollars.
Financial performance
| Metric | Q3 2023 | Q3 2022 | Nine months 2023 | Nine months 2022 |
|---|---|---|---|---|
| Sales | $8.155B | $8.797B | $24.552B | $25.465B |
| Operating profit, reported | $2.052B | $1.613B | $5.996B | $3.682B |
| Operating margin, reported | 25.2% | 18.3% | 24.4% | 14.5% |
| Operating profit, adjusted (non-GAAP) | $2.306B | $2.010B | $6.798B | $5.903B |
| Adjusted operating margin (non-GAAP) | 28.3% | 22.8% | 27.7% | 23.2% |
| Net income attributable to Linde | $1.565B | $1.273B | $4.656B | $2.819B |
| Diluted EPS, reported | $3.19 | $2.54 | $9.43 | $5.57 |
| Diluted EPS, adjusted (non-GAAP) | $3.63 | $3.10 | $10.61 | $9.13 |
- Sales fell 7% in the quarter and 4% year to date. Higher price/mix contributed 5% and 7%, respectively, but was offset by lower volumes, lower energy-cost pass-through billings, weaker Engineering sales, and net divestitures. Volume declines were primarily associated with metals and mining.
- Cost of sales was 52.9% of sales in Q3 versus 60.1% a year earlier; year to date it was 53.2% versus 59.0%. Management attributed the improvement mainly to pricing, lower pass-through costs, and productivity.
- Adjusted operating profit grew 15% in both periods, supported by pricing and productivity, partly offset by cost inflation and lower volumes. Reported nine-month profit growth also reflects the prior-year Russian business deconsolidation and impairment charges.
- Net interest expense was $40M in Q3 and $129M year to date, up from $18M and $32M, respectively, primarily due to higher interest rates on short-term debt. The reported effective tax rate was 23.8% for Q3 and 22.6% year to date.
Cash flow, debt, and liquidity
- Nine-month operating cash flow was $6.578B, versus $6.769B in 2022. Linde cited higher working-capital needs, lower Engineering customer advances, and higher cash tax payments.
- Capital expenditures were $2.636B, up $399M year over year; investing cash outflow was $3.444B, including $842M for acquisitions, primarily nexAir.
- Financing cash outflow was $4.620B, including $2.925B of ordinary-share purchases and $1.866B of dividends. Cash declined $1.542B from year-end 2022 to $3.894B.
- Total debt was $18.003B, compared with $17.914B at December 31, 2022; cash-adjusted net debt was $14.109B versus $12.478B. Short-term debt included $3.647B of commercial paper.
- Linde had $3.894B cash and no borrowings under its $5B and $1.5B unsecured revolving credit facilities. The facilities have no financial maintenance covenants. Management said it believes available cash, operating flexibility, and funding sources are sufficient for business needs.
Material changes, outlook, and risks
- On January 5, 2023, Linde acquired the remaining 77% of nexAir for $859M, or $804M net of acquired cash. The acquisition contributed $306M of sales in the first nine months and was consolidated in Americas.
- A March 2023 intercompany reorganization replaced the prior holding company with a new Linde plc listed on the NYSE. The filing reports the resulting share exchange and cancellation of historical treasury shares.
- The filing provides no specific forward earnings or EPS guidance; it directs investors to quarterly earnings releases and calls. Linde reported a $4.5B sale-of-gas project backlog under construction. Remaining performance obligations were estimated at about $47B, excluding sanctioned Russian projects; roughly half of the minimum-purchase-related revenue is expected over the next five years.
- On October 23, 2023, after quarter-end, the board authorized a further $15B share-repurchase program. At September 30, $2.369B remained under the preceding program.
- Russia-related litigation remains significant. Linde recorded a $1.1B contingent liability in other long-term liabilities related to terminated engineering projects and advance payments claimed by RusChemAlliance; the Russian proceeding continued despite a Hong Kong anti-suit injunction. Linde also disclosed about $498M of remaining contract liabilities for sanctioned Russian engineering projects.
- Brazilian state VAT claims had estimated exposure of about $115M, for which Linde recorded no liability. The company also described other tax, antitrust, appraisal, environmental, and personal-injury matters; it said aggregate losses are not expected to materially affect financial position or liquidity, while outcomes could affect results in a particular period.
- Key sensitivities identified include global economic conditions, pricing versus cost inflation, energy and raw-material availability, currency and interest-rate movements, regulation, litigation, competition, customer and end-market performance, cyber and system disruptions, and project execution. Management reported no material change in the Form 10-K risk factors.
Most important facts for investors to verify
- Whether price increases and productivity can continue to offset softer volumes and inflation, particularly in metals and mining, chemicals, and energy markets.
- Whether operating cash flow and capital spending translate into sustained debt reduction, given higher net debt and ongoing repurchases and dividends.
- Developments and possible cash effects of the RusChemAlliance matter, Russian contract liabilities, and Brazilian tax exposures.
- How much of reported earnings growth reflects underlying performance versus non-GAAP exclusions, including Linde AG purchase-accounting impacts and prior-year Russia charges.
- Execution and returns on the nexAir acquisition, the $4.5B project backlog, and the newly authorized $15B repurchase program.