Linde plc — Form 10-Q summary
Reporting period: Quarter and nine months ended September 30, 2021; comparisons are with the same 2020 periods. Amounts are in U.S. dollars unless noted. Linde operates industrial gases businesses across the Americas, EMEA and APAC, as well as Engineering and other businesses.
Financial performance
| Metric | Q3 2021 | Q3 2020 | Nine months 2021 | Nine months 2020 |
|---|---|---|---|---|
| Sales | $7.668bn | $6.855bn | $22.495bn | $19.971bn |
| GAAP operating profit | $1.292bn | $969m | $3.647bn | $2.293bn |
| GAAP operating margin | 16.8% | 14.1% | 16.2% | 11.5% |
| Adjusted operating profit | $1.810bn | $1.515bn | $5.335bn | $4.184bn |
| Adjusted operating margin | 23.6% | 22.1% | 23.7% | 21.0% |
| Net income attributable to Linde | $979m | $700m | $2.800bn | $1.731bn |
| Diluted EPS from continuing operations | $1.88 | $1.32 | $5.34 | $3.25 |
| Adjusted diluted EPS from continuing operations | $2.73 | $2.15 | $7.92 | $5.93 |
Adjusted operating profit, margin and EPS are non-GAAP measures; they exclude items including Linde AG purchase-accounting impacts and cost-reduction and other charges. Adjusted results are not substitutes for GAAP results.
- Revenue drivers: Q3 sales rose 12%, reflecting 8% volume growth, 3% price/mix, 2% currency benefit and 3% cost pass-through, partly offset by a 3% reduction from acquisitions/divestitures, primarily the APAC joint-venture deconsolidation. Cost pass-through had minimal operating-profit impact.
- Profitability: Management attributed adjusted profit growth to higher volumes and prices and productivity initiatives. Q3 reported cost of sales rose to 57.0% of sales from 55.9%, mainly due to higher cost pass-through; the nine-month ratio improved to 56.1% from 56.6% as productivity offset pass-through costs.
- Cash flow: Nine-month operating cash flow was $6.492bn, up 30% from $4.995bn. Capital expenditures were $2.247bn; net cash used in investing was $2.131bn. Financing used $3.371bn, including $3.251bn of share repurchases and $1.648bn of dividends. Cash increased to $4.700bn from $3.754bn at year-end 2020.
- Debt and liquidity: Total debt was $16.727bn versus $16.154bn at December 31, 2020; net debt was $12.027bn versus $12.400bn. Current assets of $12.007bn were below current liabilities of $14.758bn. Linde reported a $5bn undrawn revolving credit facility, with no financial maintenance covenants and no borrowings outstanding. The current portion of long-term debt increased to $2.293bn from $751m.
- Other metrics: Nine-month adjusted EBITDA was $7.582bn, up 20%, with a 33.7% margin versus 31.5%. The company had 72,159 employees, 3% fewer than a year earlier.
Material changes and notable items
- Sales increased across the industrial-gas regions: Q3 Americas +17%, EMEA +18%, and APAC +5%; Engineering sales fell 11% due mainly to project timing. EMEA and APAC operating profit grew 29% and 13%, respectively; Engineering operating profit was flat.
- Effective January 1, 2021, Linde deconsolidated an APAC joint venture after contractual rights expired. It received no consideration; the joint venture contributed about $600m of 2020 sales. The change reduced sales and segment operating profit, while its results are now reflected in equity income.
- Q3 equity-investment income included a $35m impairment charge related to an APAC joint venture. Nine-month cost-reduction and other charges were $222m, compared with $428m in 2020; estimated related cash requirements were about $236m through 2023. About half of planned severance actions had been taken, with remaining actions expected by Q1 2022.
- Nine-month other comprehensive loss was $938m, primarily from $1.124bn of currency-translation adjustments. A UK tax-rate increase contributed to an $81m deferred tax charge in the year-to-date period, partly offset by a $33m tax-settlement benefit.
- Linde repurchased $3.16bn of shares under its $5bn 2021 program by September 30; $1.838bn remained available. Nine-month dividends were $1.648bn.
Outlook, risks and contingencies
The filing gives no specific forward earnings or EPS guidance. Linde stated that it provides quarterly operating updates and guidance through earnings releases and investor calls. Management said it believed cash, operating flexibility and funding sources were sufficient for global business needs and did not anticipate limits on access to debt markets or other external funding.
Risks identified include foreign-exchange and interest-rate movements; energy and raw-material cost and availability; ability to pass cost increases through to customers; economic conditions, competition and customer performance; regulation, taxes and environmental matters; litigation; cybersecurity and systems disruptions; and acquisition integration. Management reported no material change to the risk factors in the 2020 Form 10-K.
Contingencies include Brazilian tax claims with estimated exposure of about $205m, for which no liability was recorded, and pending Brazilian antitrust appeals. Linde said it was vigorously defending these matters; it considers cash outflows in the antitrust case extremely unlikely. Former Linde AG shareholders also seek increased consideration in German appraisal proceedings; no reserve was established. Management did not expect aggregate losses from legal matters to materially affect consolidated financial position or liquidity, though outcomes could affect results in a particular period.
Important facts for investors to verify
- Reconcile GAAP and adjusted earnings, particularly the substantial Linde AG purchase-accounting adjustments and cost-reduction charges.
- Track cash conversion, working-capital movements and the duration and collection of Engineering contract liabilities and customer advances.
- Review debt maturities, refinancing needs and the adequacy of liquidity given current liabilities exceeded current assets.
- Assess ongoing share repurchases and dividends against capital spending, debt levels and operating cash flow.
- Monitor the APAC joint-venture deconsolidation, impairment and effect on future sales, operating profit and equity income.
- Follow developments in the Brazilian tax and antitrust matters and German shareholder appraisal proceedings.