Linde plc — Q2 2022 Form 10-Q
Business context and period: Industrial gases and engineering company; unaudited quarter and six months ended June 30, 2022. Financial amounts are in U.S. dollars unless noted.
Key financial metrics
| Metric | Q2 2022 | Q2 2021 | Six months 2022 | Six months 2021 |
|---|---|---|---|---|
| Sales | $8.457 billion | $7.584 billion | $16.668 billion | $14.827 billion |
| GAAP operating profit | $589 million | $1.142 billion | $2.069 billion | $2.355 billion |
| GAAP operating margin | 7.0% | 15.1% | 12.4% | 15.9% |
| Adjusted operating profit and margin | $1.988 billion; 23.5% | $1.837 billion; 24.2% | $3.893 billion; 23.4% | $3.525 billion; 23.8% |
| Net income attributable to Linde | $372 million | $841 million | $1.546 billion | $1.821 billion |
| Diluted EPS, GAAP / adjusted | $0.74 / $3.10 | $1.60 / $2.70 | $3.04 / $6.03 | $3.46 / $5.19 |
| Operating cash flow | Not provided quarterly | Not provided quarterly | $4.133 billion | $3.936 billion |
Sales rose 12% in both the quarter and first half. Management attributed growth principally to pricing, higher volumes and contractual energy-cost pass-through; currency reduced sales by 5% in Q2 and 4% year to date. Pass-through had minimal operating-profit impact. Adjusted results are non-GAAP and exclude Russia-related and other charges and Linde AG purchase-accounting impacts.
At June 30, cash was $3.655 billion and total debt was $16.043 billion, versus $2.823 billion and $14.207 billion at December 31, 2021. Net debt was $12.388 billion, up from $11.384 billion. Current assets were $11.272 billion and current liabilities $15.295 billion. Linde had an undrawn $5 billion revolving credit facility, expiring in March 2024, with no financial maintenance covenants. Capital expenditures were $1.475 billion for the first half; share repurchases were $3.329 billion and dividends $1.177 billion.
Material changes versus prior year
- Reported operating profit fell 48% in Q2 and 12% in the first half, chiefly reflecting $993 million of Q2 and $989 million of first-half Russia-Ukraine conflict and other charges. Adjusted operating profit increased 8% and 10%, respectively; adjusted diluted EPS increased 15% and 16%.
- The Russia charges included a $787 million loss on deconsolidation of Russian gas and engineering entities and approximately $380 million of receivables written off. Linde determined it no longer controlled those entities as of June 30, retained an investment at estimated fair value, and received no consideration.
- Cost of sales increased 18% in both periods, faster than sales, primarily due to inflation and higher volumes; its share of sales also rose, in part due to pass-through costs. Management cited pricing and productivity as offsets to inflation.
- Other comprehensive income included substantial foreign-currency translation losses: $1.699 billion in Q2 and $1.651 billion for the first half. These reduced equity despite positive net income.
Outlook, risks and unusual items
The 10-Q does not provide a specific earnings or full-year financial guidance figure. Linde said it provides quarterly updates and guidance through earnings releases and investor calls. Management stated it believes cash, operating flexibility and funding sources are sufficient for business needs.
Risks include inflation and energy and raw-material costs, currency and interest-rate movements, ability to achieve price increases, sanctions and the war in Ukraine, customer and market conditions, and litigation and regulatory matters. Approximately $1.9 billion of contract liabilities relate to Russian engineering projects subject to sanctions; fulfilling related obligations could adversely affect cash flows. Sanctioned Russian projects represented about $300 million of Engineering sales in Q2 and $650 million in the first half.
Management disclosed Brazilian tax claims with estimated exposure of approximately $215 million and no recorded liability, citing its assessment of the claims. It also described Brazilian antitrust fines that had been overturned by lower courts and for which no reserve was recorded; appeals remain pending in one matter. Other legal matters include German appraisal proceedings by former Linde AG shareholders. Management did not expect aggregate losses from ordinary-course proceedings to materially affect consolidated financial position or liquidity, but outcomes could significantly affect results in a particular period.
Subsequent event: in July 2022, Linde agreed to sell its GIST business for approximately $275 million plus potential earnouts, subject to regulatory approval and expected to close in the second half of 2022. The company reported no material changes to its 2021 Form 10-K risk factors and said disclosure controls were effective.
Important facts for investors to verify
- How the Russian deconsolidation, impairment valuation and receivable write-off affect future results, cash flows and any remaining investment value.
- Whether Russian engineering projects can be completed or otherwise resolved, and the cash-flow implications of the $1.9 billion related contract liabilities.
- Underlying pricing, volumes, inflation and cost pass-through trends, including the durability of adjusted margin and earnings growth.
- Debt and liquidity developments, including commercial-paper reliance, planned share repurchases, and the terms and completion of the GIST sale.
- Developments in Brazilian tax and antitrust matters and German appraisal proceedings, including any changes to reserves or estimated exposure.