Linde plc — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Unaudited consolidated results are compared with the corresponding 2019 periods. Linde supplies industrial gases and related products and operates across the Americas, EMEA, APAC, Engineering and other businesses.
Financial performance
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Sales | $6.855bn | $7.000bn | $19.971bn | $21.148bn |
| GAAP operating profit | $969m | $1.000bn | $2.293bn | $2.278bn |
| GAAP operating margin | 14.1% | 14.3% | 11.5% | 10.8% |
| Income from continuing operations attributable to Linde | $699m | $728m | $1.728bn | $1.676bn |
| Diluted continuing-operations EPS | $1.32 | $1.34 | $3.25 | $3.07 |
| Adjusted operating profit (non-GAAP) | $1.515bn | $1.384bn | $4.184bn | $3.925bn |
| Adjusted operating margin (non-GAAP) | 22.1% | 19.8% | 21.0% | 18.6% |
| Adjusted diluted continuing-operations EPS (non-GAAP) | $2.15 | $1.94 | $5.93 | $5.46 |
Cost of sales, excluding depreciation and amortization, fell to 55.9% of sales in Q3 from 58.0%; for the nine months it was 56.6%, versus 58.9%. SG&A was 11.2% of Q3 sales and 12.0% year to date, down from 12.1% and 12.4%, respectively. Adjusted EBITDA was $2.233bn for Q3 and $6.298bn year to date; these are non-GAAP measures.
Cash flow, debt and liquidity
- Operating cash flow for the first nine months was $4.995bn, up 27% from $3.945bn. Capital expenditures were $2.373bn, compared with $2.667bn.
- Cash and cash equivalents were $5.199bn at September 30, up from $2.700bn at year-end 2019.
- Total debt was $17.803bn, versus $13.956bn at year-end; net debt was $12.604bn, versus $11.256bn. Short-term debt increased to $4.024bn from $1.732bn.
- Linde had no borrowings under its $5bn unsecured revolving credit facility, which expires in March 2024 and has no financial maintenance covenants. Management said cash and funding sources were sufficient for business needs.
- Cash dividends to Linde shareholders were $1.523bn for the nine months; share repurchases were approximately $2.030bn in the cash flow statement. The $6bn repurchase authorization had $1.702bn remaining at September 30.
Material changes and management commentary
- Q3 sales declined 2%; nine-month sales declined 6%. Management attributed the decrease primarily to COVID-19-related volume weakness, partly offset by higher pricing. For the nine months, currency translation also reduced sales by 3%.
- Q3 adjusted operating profit rose 9% and adjusted EPS rose 11%; for the nine months, they increased 7% and 9%. Management cited pricing, cost-reduction and productivity actions, partly offset by lower volumes, currency effects and cost inflation.
- Reported Q3 operating profit fell 3%, while reported continuing-operations EPS fell 1%. Comparisons included a $164m prior-year gain on sale of businesses and prior-year purchase-accounting measurement benefits; 2020 also had higher cost-reduction charges year to date.
- The company recorded $428m of cost-reduction and other charges in the first nine months, versus $355m in 2019. These included $330m of cost-reduction program charges. Severance actions were substantially complete, with remaining work expected during 2021; related cash requirements were estimated at about $338m, payable through 2022.
- Q3 segment operating profit increased in the Americas, EMEA and APAC; Engineering profit declined 12% due mainly to project timing and cost absorption. Nine-month segment sales declined in the Americas, EMEA and APAC, while Engineering sales increased.
Outlook, risks and contingencies
- Linde reported an approximately $8.6bn sale-of-gas and sale-of-equipment project backlog, including $3.7bn of sale-of-gas projects. The company described this as a foundation for growth over several years, but did not provide a specific earnings or sales forecast in this filing.
- Management said COVID-19’s eventual effect depends on its duration, containment measures, customer demand and governmental actions. The filing describes operational changes made to protect employees and serve customers.
- Key stated risks include macroeconomic conditions, currency and interest-rate movements, energy and raw-material costs, regulation, litigation, competition, cybersecurity and the pandemic’s effects.
- Brazilian tax claims had estimated exposure of approximately $190m; Linde recorded no liability, citing management’s assessment and legal advice. The company also described pending Brazilian competition-law appeals and German appraisal proceedings relating to the Linde AG squeeze-out; no reserve was recorded for these matters. Management stated that aggregate litigation losses were not expected to materially affect financial position or liquidity, though outcomes could affect results in a period.
- Foreign-currency translation reduced other comprehensive income by $1.268bn for the nine months, while Q3 translation adjustments were positive $703m.
Important facts for investors to verify
- How much of adjusted profit and EPS growth reflects recurring operations versus exclusions, particularly purchase-accounting impacts and cost-reduction charges.
- Whether COVID-related volume trends, price realization and segment-level performance persist, and how much of the reported backlog converts to revenue and cash flow.
- The outlook for short-term debt and refinancing needs, given the increase in total and short-term debt, and the company’s planned use of cash for investment, dividends and repurchases.
- Developments in the Brazilian tax and competition matters and German appraisal proceedings, including any change in exposure, probability or recorded reserves.
- The timing and cash costs of the remaining restructuring actions and the progress and economics of the $8.6bn project backlog.