Linde plc — Q1 2021 Form 10-Q
Reporting period: Three months ended March 31, 2021; balance-sheet comparisons are with December 31, 2020. Amounts are in U.S. dollars unless otherwise noted. Linde supplies industrial gases and related engineering services.
Financial performance
| Metric | Q1 2021 | Q1 2020 | Change |
|---|---|---|---|
| Sales | $7.243 billion | $6.739 billion | +7% |
| Operating profit, GAAP | $1.213 billion | $733 million | +65% |
| Operating margin, GAAP | 16.7% | 10.9% | +5.8 percentage points |
| Operating profit, adjusted (non-GAAP) | $1.688 billion | $1.352 billion | +25% |
| Adjusted operating margin (non-GAAP) | 23.3% | 20.1% | +3.2 percentage points |
| Net income attributable to Linde | $980 million | $573 million | +71% |
| Diluted EPS from continuing operations, GAAP | $1.86 | $1.07 | +74% |
| Adjusted diluted EPS from continuing operations (non-GAAP) | $2.49 | $1.89 | +32% |
| Operating cash flow | $2.109 billion | $1.347 billion | +57% |
| Capital expenditures | $762 million | $803 million | -$41 million |
Sales growth reflected 3% higher volumes, 2% price/mix, 4% favorable currency translation and 1% cost pass-through, partly offset by a 3% reduction from acquisitions/divestitures, principally the APAC joint venture deconsolidation. Management cited healthcare, electronics and recovering cyclical markets as volume drivers. Adjusted measures exclude specified items, including Linde AG purchase-accounting impacts; they are non-GAAP and may not be comparable with similarly named measures at other companies.
Cost of sales was 56.0% of sales versus 57.0%; SG&A was 10.9% versus 12.8%. Reported effective tax rate was 21.6% versus 21.9%; adjusted rate was 23.9% in both periods. EBITDA from continuing operations was $2.422 billion (33.4% of sales), and adjusted EBITDA was $2.438 billion (33.7% of sales).
Liquidity, debt and capital allocation
- Cash and cash equivalents were $4.096 billion, up from $3.754 billion at year-end. Total debt was $15.750 billion, down from $16.154 billion; reported net debt was $11.654 billion, versus $12.400 billion.
- Current assets were $11.132 billion and current liabilities $15.027 billion. The current portion of long-term debt increased to $2.524 billion from $751 million, affecting near-term liability comparisons.
- Operating cash flow was $2.109 billion; investing cash outflow was $751 million and financing cash outflow was $970 million. The company reported a $5 billion undrawn revolving credit facility, expiring March 2024, with no financial maintenance covenants and no borrowings outstanding. Management said available cash, funding sources and operating flexibility were sufficient for business needs.
- Cash dividends were $553 million, or $1.06 per share. Linde repurchased $868 million of shares in the cash-flow statement; the filing reports $768 million under the 2021 repurchase program and $4.9 billion under the prior program. The new program authorizes up to $5 billion, subject to market and business conditions, and runs through July 31, 2023.
- Capital expenditures were $762 million. The sale-of-gas large-project backlog under construction was approximately $3.5 billion.
Material changes and notable items
- All reportable segments increased sales and segment operating profit year over year. Adjusted segment operating profit rose 20% in Americas, 27% in EMEA, 25% in APAC and 20% in Engineering. Segment results exclude items not considered indicative of ongoing performance.
- Effective January 1, 2021, Linde deconsolidated an APAC joint venture after certain contractual rights expired and were not renewed. It recorded a $52 million gain within cost reduction programs and other charges, received no consideration, and now accounts for its interest as an equity investment. The venture contributed approximately $600 million of sales in 2020; management said EPS would not be affected because Linde’s ownership percentage was unchanged.
- Reported Q1 2021 results included a net $8 million benefit from cost reduction programs and other charges, compared with a $131 million charge in Q1 2020. The 2021 amount included the $52 million JV deconsolidation gain; cost-reduction program charges themselves were $44 million.
- Other comprehensive loss was $661 million, primarily reflecting $715 million of foreign-currency translation adjustments. This reduced reported comprehensive income attributable to Linde to $325 million despite positive net income.
- Employee count was 71,699, down 7,309 year over year, primarily due to cost-reduction actions and divestitures.
Outlook, risks and contingencies
The 10-Q does not provide a specific earnings or financial forecast; it says quarterly guidance and updates are provided through earnings releases and investor teleconferences. Management highlighted ongoing productivity initiatives and stated it expected to meet business needs with available liquidity and funding. Estimated 2021 pension contributions were $70 million to $80 million, of which $12 million had been made by March 31.
The filing identifies exposure to currency and interest-rate movements, energy and raw-material costs, pricing, economic and industry conditions, pandemics, regulation, litigation, cybersecurity and acquisition integration, among other risks. Management reported no material changes to the risk factors in the 2020 Form 10-K. It said aggregate litigation losses were not expected to materially affect consolidated financial position or liquidity, while acknowledging outcomes could significantly affect results in a given period.
Notable legal matters include approximately $190 million of estimated Brazilian tax claims for which no liability was recorded, based on management’s assessment and outside counsel; Brazilian antitrust fines under appeal, for which management considered cash outflows extremely unlikely and recorded no reserve; and German appraisal proceedings relating to the former Linde AG squeeze-out, for which no reserve was established. Cost-reduction and other-charge cash requirements were estimated at approximately $24 million, expected to be paid through 2022.
Important facts for investors to verify
- Reconcile the substantial difference between GAAP and adjusted operating profit and EPS, particularly the recurring Linde AG purchase-accounting impacts and the JV-related gain.
- Review the sustainability and drivers of volume, price and productivity growth, including the effect of currency movements and the APAC JV deconsolidation on comparability.
- Assess debt maturities and refinancing needs, including the increase in current long-term debt, alongside cash, the undrawn revolver and planned share repurchases and dividends.
- Monitor the Brazilian tax and antitrust cases and the German appraisal proceedings for developments that could change reserves, cash exposure or reported results.
- Confirm the latest company guidance separately: this filing directs readers to quarterly earnings releases and investor teleconferences rather than stating a specific forecast.